BRAND v REGISTRAR OF COMPANIES [2018] NZHC 3148

BRAND v REGISTRAR OF COMPANIES [2018] NZHC 3148 [30 November 2018]IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYI TE KŌTI MATUA O AOTEAROATE WHANGANUI-A-TARA ROHECIV-2015-485-000621[2018] NZHC 3148BETWEEN DUNCAN CLEMENT BRANDAppellantAND REGISTRAR OF COMPANIESRespondentHearing: 23–26 July 2018Appearances: M Kersey and N L Walker for AppellantR S May and T G Bain for RespondentJudgment: 30 November 2018JUDGMENT OF CULL JTABLE OF CONTENTSINTRODUCTION AND BACKGROUND 1Factual background 6HC partnership 8Aorangi 13Trust Management 15Forresters 16Events from 2006 17Statutory management and subsequent events 20Nature of the appeal 32Grounds of appeal 34Relevant law 36FIRST STAGE OF INQUIRY: QUALIFYING STATUS OF COMPANIES 48Insolvency is not a prerequisite 50Analysis 56Conclusion 65SECOND STAGE OF INQUIRY: CAUSAL CONNECTION BETWEEN MISMANAGEMENTAND QUALIFYING COMPANY STATUS 69Was there mismanagement of the three companies? 75Findings on mismanagement of Forresters and Trust Management 76Mr Brand's position 78Analysis 84Findings of mismanagement of Aorangi 91Mr Brand's position 93Analysis 95Was there a causal connection between mismanagement and statutory management? 102Forresters and Trust Management 104Aorangi 108The introduced assets 112Serious Fraud Office interview 122Analysis of director's duties breaches 128Aorangi operating in breach of the Securities Act and the Financial Reporting Act 130Failure to maintain proper accounting records 139Failing to exercise care, diligence and skill 143Alleged misrepresentations to investors 153Allegation of failure to manage or supervise the affairs of Aorangi 160Analysis 163Conclusion 169THIRD STAGE OF INQUIRY: DISCRETION TO PROHIBIT 170Legal principles 177The purpose and focus of s 385 179The Deputy Registrar's exercise of discretion 181The principle error 188Statutory purpose in imposing prohibition 192The risk to the public 194Inconsistent findings 200Mr Brand's role in the companies 204Analysis 216Mr Brand's role in the wind-down of Aorangi 219Rescue culture 232The "loan" misunderstanding 235Section 385 provides a simple and swift process 237Conclusion 240FOURTH STAGE OF INQUIRY: THE TERM OF PROHIBITION 244Breach of natural justice allegations 250SUMMARY OF CONCLUSIONS 251Result 254INTRODUCTION AND BACKGROUND[1] Mr Brand appeals a decision of the Deputy Registrar of Companies under s 385of the Companies Act 1993 (the Act) prohibiting him from being a director for fouryears.[2] Mr Brand was the director of three companies, which were closely associatedwith the late Allan Hubbard, the former director of South Canterbury Finance Ltd(SCF). Following a complaint from an investor of one of the companies, AorangiSecurities Ltd (Aorangi), the Registrar of Companies commenced an investigation andrecommended to the Securities Commission that Aorangi was being operatedrecklessly and fraudulently.[3] In June 2010, Aorangi was placed in statutory management, following theSecurities Commission's recommendation to the Minister. Three months later, the twofurther companies of which Mr Brand was a director were also placed under statutorymanagement.[4] Five years after the imposition of statutory management, the Deputy Registrarof Companies (Deputy Registrar) prohibited Mr Brand from being a director orpromotor of a company, or being concerned in or taking part in the management of acompany for four years (the Decision).1 Mr Brand appeals that Decision. Mr Brandsubmits the Decision should be set aside, or alternatively, a lesser period of prohibitionshould be imposed.[5] The issues for determination in this appeal are:(a) Did the Deputy Registrar err by finding that it was reasonable to placethe companies into statutory management, thereby making themqualifying companies under s 385 of the Act?(b) Did the Deputy Registrar err in finding that the mismanagement of thecompanies was a contributing factor to the qualifying status of thecompanies under s 385 of the Act?(c) Did the Deputy Registrar err in exercising his discretion to impose aprohibition on Mr Brand from being a director under s 385(4)(b)(ii) ofthe Act?(d) If not, was the imposition of the four year prohibition periodappropriate in the circumstances?Factual background[6] Mr Brand is a former director of three companies:(a) Aorangi Securities Ltd (Aorangi);1 Section 385 Companies Act 1993 – Duncan Clement Brand Final Minute of Deputy Registrar ofCompanies, 20 July 2015 [Decision].(b) Forresters Nominee Company Ltd (Forresters); and(c) Hubbard Churcher Trust Management Ltd (Trust Management).[7] Mr Brand is a chartered accountant. He started working at Hubbard Churcherand Co (HC partnership) in November 1982. In April 1986, he became a partner ofHC partnership and has continued to act as a principal of the firm for 32 years. MrBrand was also a director of several other companies, which were related to hisaccounting practice or his family and friends.HC partnership[8] Mr Hubbard was a partner in the HC accountancy partnership and Mr Brandbecame a partner on 1 April 1986. At the time he entered the partnership, Aorangi andForresters had already been incorporated.[9] HC partnership is based in Timaru and is the largest accounting firm there,serving many local businesses in South Canterbury and the wider region. Thestructure and operations of HC partnership have evolved since it was formed. WhenMr Brand joined, it was Hubbard Churcher and Co partnership. In 2009, when MrHubbard resigned, the partnership was restructured into a company, called HC PartnersLtd. In 2011, it became a limited partnership, HC partnership. In this decision, it willbe referred to simply as HC partnership.[10] Mr Hubbard was actively involved in various businesses as a director andinvestor, often involving HC partnership, which provided financial managementadvice, administration and compliance services. HC partnership has reverted to beinga traditional accounting practice and has moved away from its previous involvementin the administration and secretarial roles of entities associated with Mr Hubbard.Since 2010, HC partnership has not operated or been involved with a business similarto Aorangi.[11] HC partnership has one general partner, HC Accounting Ltd.2 HC Accountingis responsible for the management of the limited partnership. Mr Brand, because ofhis prohibition, cannot be a director of HC Accounting, the burden for which falls onhis fellow partners. As one of the partners is ill, the partnership wants Mr Brand toreturn to work.[12] There are various companies related to Mr Hubbard. The companies in issuein this case are those where Mr Brand was a director, namely Aorangi, Forresters andTrust Management.Aorangi[13] Aorangi was incorporated in 1974. Mr Brand was appointed a director ofAorangi when he became a partner of HC partnership in 1986. He continued as adirector until his resignation in June 2009, just over a year before statutorymanagement of the company was imposed. Other partners of HC partnership werealso directors of Aorangi during this time. Mr Hubbard was a director of Aorangi untilhis death on 2 September 2011, including during the period of statutory management.[14] At the time of Mr Brand's appointment, Aorangi was a small contributorymortgage company, operated as part of the HC partnership accountancy practice.Aorangi expanded and diversified its investments, extending beyond first mortgageadvances. Mr Hubbard primarily undertook these activities on a daily basis.Trust Management[15] Trust Management was incorporated in 1986 to be an independent trustee forfamily trusts associated with the HC partnership practice and to act as bare trusteeowner of investments held on behalf of clients of Mr Hubbard. It never entered into2 HC partnership has five limited partners, all of which are registered companies in New Zealand.Unlike HC Accounting, the general partner, the limited partners cannot be involved in themanagement of HC partnership. The shareholders of those partner companies are trusts withcorporate trustee companies. In relation to Mr Brand's practice, DCB Accounting Ltd is thepartner company; the directors of DCB are Mr Brand's wife, Mrs Carole Brand, and his fellowHC partnership partners, Mr Copland and Mr Wolffenbuttel; DCB Trustee Ltd (as trustee of theDCB Accounting Trust) is the shareholder of DCB; and Mrs Brand is the sole director of DCBTrustee.any financial transactions on its own account. Mr Brand was appointed as a directoron its incorporation.Forresters[16] Forresters was incorporated in 1981 to be a nominee owner of assets held onbehalf of clients of HC partnership. It also held assets as a bare trustee, and neverentered into any financial transactions on its own account.Events from 2006[17] On 12 December 2006, the partners of HC partnership raised with Mr Hubbardthe need for guarantees in respect of funds received by Mr Hubbard in the HubbardManaged Funds (HMF) or Aorangi/Forresters. Mr Hubbard said he would ensure thatpartners were protected against claims, extending to his trustees in the event of hisdeath. The concern arose because statements were issued in the firm's name andreferred to "funds with Hubbard Churcher and Co". Mr Hubbard was in discussionsto transfer the share portfolio to another fund management service. The partnersrecorded that investments should not be held in the name of Trust Management, as itwas "supposed to be a bare trustee company, with no assets." Mr Hubbard advisedthat this would also "be tidied up on transfer of the HMF portfolio."[18] On 22 March 2007, the HC partners discussed the operation of Aorangi, whichthey recorded in their partnership minutes, as appearing "to contravene ICANZ rulesrelated to handling of client funds, and also the Securities Act and Regulations re thetaking of deposits without a prospectus." The partners unanimously resolved that theydid not wish to continue ownership of Aorangi, nor take an equity position in the futurereorganisation of the company, as Mr Hubbard proposed, and did not want to acceptthe ongoing liability in respect of the company's past or future activities, either throughownership or directorship. Guarantees were to be sought and obtained from MrHubbard to include an indemnity in respect of the company's past operations, with aview to the current directors resigning and the shares in Aorangi being sold to newowners.[19] On 19 June 2009, Mr Brand resigned as a director of Aorangi and Forresters.Statutory management and subsequent events[20] The three companies were placed into statutory management in 2010.[21] On 28 February 2010, the Securities Commission received an anonymouscomplaint from an Aorangi investor.[22] On 15 March 2010, Aorangi received a letter from the Securities Commissionadvising of the received complaint, that Aorangi had been making offers of securitiesto the public but had not registered a prospectus or provided investors with aninvestment statement as required under the Securities Act 1978. The SecuritiesCommission asked Aorangi to provide a full description of its lending and borrowingactivities, together with other related information.[23] On 4 June 2010, the Registrar of Companies appointed four people to conductan investigation of Aorangi, Forresters and a number of charitable trusts.[24] On 8 and 9 June 2010, the investigators visited Timaru and interviewed MrHubbard.[25] On 18 June 2010, the Registrar reported to the Securities Commission thatAorangi was in serious financial difficulty and had been trading recklessly andfraudulently in breach of the Securities Act, Financial Reporting Act 1993, theCompanies Act and possibly the Crimes Act 1961. The report ran to 489 pages,including appendices. Aorangi was placed into statutory management following arecommendation from the Securities Commission. The Commission alsorecommended that various charitable trusts and Mr and Mrs Hubbard personally, beplaced under statutory management.[26] On 20 June 2010, the Securities Commission recommended to the Ministerthat statutory management be imposed on Aorangi and Mr and Mrs Hubbard.[27] Three months later, on 20 September 2010, Forresters and Trust Managementwere also placed under statutory management, after the statutory managers of Aorangiformed the view that these companies were the corporate vehicles for HMF, whichwas discovered during the statutory management of Aorangi. The statutory managersof Aorangi believed HMF was an unincorporated scheme operated in Mr Hubbard'sown name and controlled by him. The scheme appeared to have receivedapproximately $80 million from the public by way of investment, with the vastmajority doing so, without clear investment instructions or giving investmentauthorities to Mr Hubbard. The rationale for placing Forresters and Trust Managementinto statutory management was to provide the statutory managers with the control theyneeded to protect and manage the investments in HMF.[28] Mr and Mrs Hubbard brought judicial review proceedings regarding theimposition of statutory management on them personally. The Serious Fraud Office(SFO) conducted an investigation and announced, on 20 June 2011, that charges wouldbe laid against Mr Hubbard. On 2 September 2011, before the judicial review hearing,Mr Hubbard died. In late 2011, the Hubbards were released from statutorymanagement. On 18 September 2014, Aorangi was released from statutorymanagement, as were Forresters and Trust Management on 24 December 2015.Forresters and Trust Management had no creditors, as they had not entered intotransactions on their own account. Creditors of Aorangi were paid 99.037 cents on thedollar, after statutory management fees and expenses of approximately $12.7 million.3[29] On 25 July 2013, the Ministry of Business, Innovation and Employment(MBIE) gave notice to Mr Brand that it was considering referring him to the Registrarfor a prohibition decision, under s 385 of the Act. MBIE produced an undatedprohibition report to the Deputy Registrar of Companies. Mr Brand disputed theextent of disclosure made by MBIE, as it had withheld several documents. Thatdispute had not been fully resolved by the time Mr Brand's case was referred to theDeputy Registrar. Mr Brand filed an interlocutory application for discovery againstMBIE, but it was declined in this Court on 9 December 2016.4[30] On 9 March 2015, the Deputy Registrar issued a minute (the interim minute)noting the disclosure dispute, but recording that this was not a barrier to matters3 During this hearing, Mr Brand's counsel confirmed that creditors were paid their capital andinterest (some investors elected to capitalise interest owed) for the relevant periods on theirinvestments.4 Brand v Registrar of Companies [2016] NZHC 2983.proceeding further. The Deputy Registrar noted that no material was before him thathad not been disclosed to Mr Brand. This decision was confirmed in a later minute(the supplementary minute).[31] On 20 July 2015, the Deputy Registrar issued his Decision and, exercising thepower under s 385 of the Act, he prohibited Mr Brand from being a director or takingpart in the management of any company for four years.5 The prohibition period is dueto expire in July 2019.Nature of the appeal[32] The Deputy Registrar's decision was made under s 385 of the Act. It iscommon ground that s 370 of the Act provides for a general right of appeal to thisCourt.6 Section 370 provides:370 Appeals from Registrar's decisions(1) A person who is aggrieved by an act or decision of the Registrar underthis Act may appeal to the court within 15 working days after the dateof notification of the act or decision, or within such further time as thecourt may allow.(2) On hearing the appeal, the court may approve the Registrar's act ordecision or may give such directions or make such determination inthe matter as the court thinks fit.[33] The established principles from the Supreme Court's decision in Austin,Nichols & Co Ltd v Stichting Lodestar apply.7 The appellant bears the onus ofsatisfying the appellate court that its decision should differ from that under appeal.8The appellate court is entitled to its own assessment of the merits of the case. Theweight which is given to the reasoning of the body below is a matter for the Court'sassessment.95 Decision, above n 1.6 Mani v Registrar of Companies [2016] NZHC 3002, (2016) 11 NZCLC 98-048 at [5]; andDavidson v Registrar of Companies [2011] 1 NZLR 542 (HC) at [84].7 Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [16].8 At [4].9 At [5]; and Davidson, above n 6, at [84].Grounds of appeal[34] In broad terms, Mr Brand says the Deputy Registrar:(a) misapplied s 385(1)(e) of the Act, by failing to assess the solvency ofthe companies at the time that statutory managers were appointed;(b) misdirected himself as to the appropriate burden of proof andframework within which his decision should have been made;(c) erroneously purported to make findings that the companies werequalifying companies for the purpose of s 385(4)(a);(d) erred in fact and in law in finding that the companies were mismanagedat all;(e) when exercising his discretion under s 385(4)(b), the Deputy Registrar:(i) was exercising his discretion with a predetermined outcome inmind;(ii) took into account irrelevant considerations and failed to takeaccount of relevant considerations; and(iii) failed to meet minimum standards of natural justice; and(f) the length of the four year prohibition was unjust and inequitable.[35] Mr Brand contends that he behaved appropriately, sought to address any risksarising in relation to Aorangi's management and is not a risk to the public. He submitsthe companies were not mismanaged.Relevant law[36] The critical provision is s 385 of the Act, which is set out in full in Appendix1. The definition of a qualifying company for the application of the section iscontained in subss (1) and (2), although this case concerns subs (1), which provides:385 Registrar or FMA may prohibit persons from managingcompanies(1) This section applies in relation to a company—(a) that has been put into liquidation because of its inability topay its debts as and when they became due:(b) that has ceased to carry on business because of its inability topay its debts as and when they became due:(c) in respect of which execution is returned unsatisfied in wholeor in part:(d) in respect of the property of which a receiver, or a receiverand manager, has been appointed by a court or pursuant to thepowers contained in an instrument, whether or not theappointment has been terminated:(e) in respect of which, or the property of which, a person hasbeen appointed as a receiver and manager, or a judicialmanager, or a statutory manager, or as a manager, or toexercise control, under or pursuant to any enactment, whetheror not the appointment has been terminated:(f) that has entered into a compromise or arrangement with itscreditors:(g) that is in voluntary administration under Part 15A.[37] The Registrar (or the FMA) is empowered to prohibit a person from being adirector for a period not exceeding 10 years after the Registrar has given that personwritten notice, under s 385(3).10[38] Before exercising the power to prohibit a person from being a director, s 385(4)provides that the Registrar must be satisfied that the person was concerned in themanagement of the company or companies, and the manner in which the affairs of thecompany were managed was wholly or partly responsible for the company'squalifying status under s 385.[39] The legislative history and policy of s 385 is canvassed by Miller J in Davidsonv Registrar of Companies, the first appeal decision from this section of the Act.1110 The maximum period of prohibition which applied to Mr Brand was five years, because of thetime period in which his conduct occurred and when the companies were placed into statutorymanagement. The maximum period is now 10 years, as of 1 April 2014: see Financial Markets(Repeals and Amendments) Act 2013, s 150.11 Davidson, above n 6, at [87]–[92].Introduced in 1988 as s 189A of the Companies Act 1955, the then-Minister of Justice,the Rt Hon Geoffrey Palmer, addressed the scheme of the new section, because of the"growing public concern about persons who use the benefits of limited-liabilitycompanies to wheel and deal for their own benefit, leaving behind unpaid creditors,and companies in financial difficulties."12 The Registrar of Companies wasempowered to prohibit a person from managing companies for a specified period,where a company is in financial difficulties and where those financial difficulties areattributable to mismanagement, when the person concerned is an officer of thecompany.[40] As the Minister of Justice described it, the person concerned bears the onus ofsatisfying the Registrar and the Securities Commission that he or she was notresponsible for the mismanagement that caused the company's financial difficulties.The section, now s 385, was introduced following the sharemarket crash of 1987, whenit had become "more apparent that there are persons who have been directors whohave demonstrated that they are not fit and proper persons to be involved in themanagement of companies."13[41] Before Davidson, there were no cases under s 385 (or its predecessor). Miller Jreferred, however, to the predecessor section in First City Corp Ltd v DownsviewNominees Ltd.14 There, Gault J characterised the former prohibition section asproviding for:15denial of the privilege of participating in the conduct of business under theshelter of limited liability. It is penal in nature although the disqualificationshould be approached with protection of the public in mind rather thanpunitively.[42] Taking this into account, Miller J considered s 385 as being both punitive andprotective in character because:1612 (21 July 1988) 490 NZPD 5284.13 At 5284.14 First City Corp Ltd v Downsview Nominees Ltd [1989] 3 NZLR 710 (HC), as cited in Davidson,above n 6, at [89].15 First City, above n 14, at 766.16 Davidson, above n 6, at [91].(a) the legislation examines mismanagement contributing to insolvency,without focusing on the conduct of any given director;(b) causation having been established, the Registrar may prohibit anyonefalling into the class of directors;(c) prohibition is aimed not at remedying wrongs done to shareholders andcreditors of the insolvent company but at protecting the public fromunscrupulous or incompetent directors in future, deterring others, andsetting appropriate standards of behaviour; and(d) prohibition is an adverse consequence of an inquiry into a director'sinvolvement in an insolvent company and the director inevitablyexperiences prohibition as a punishment.[43] Under s 385(4), in order to exercise the power of prohibition, the Registrarmust be "satisfied" that prohibition is appropriate.17 The standard of proof is thebalance of probabilities.18 In the second decision under s 385, Mani v Registrar ofCompanies, Thomas J referred to the Supreme Court's decision in Z v DentalComplaints Assessment Committee.19 The Judge observed:20While criminal charges are not involved, there are serious consequences of anorder under s 385 which will have a significant effect on the person subject tothe order. In those circumstances, and given the summary process, higherquality evidence may be necessary for the decision-maker in order to besatisfied in terms of s 385(4).[44] The protective and punitive aspects of s 385(4) are considered further in thisjudgment under the third stage of the Registrar's inquiry.21[45] In Davidson, Miller J summarised the steps required for the Registrar's inquiryunder s 385 as follows:2217 Davidson, above n 6, at [102]; and Mani, above n 6, at [14].18 Mani, above n 6, at [15]–[16].19 Z v Dental Complaints Assessment Committee [2008] NZSC 55, [2009] 1 NZLR 1 at [102].20 Mani, above n 6, at [17].21 At [179] of this judgment.22 Davidson, above n 6, at [103].a) Does the company, or do the companies where there were more thanone, qualify under subsection (1);b) Was the respondent a director or manager of the company orcompanies 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 manageda contributing cause of its qualifying status; and if soii) ought the Registrar exercise the discretion to prohibit therespondent 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, orall but one of them, were managed was not acontributing cause of their qualifying status;alternatively(ii) it would not be just and equitable to prohibit therespondent in all the circumstances; andii) if the respondent has not satisfied the Registrar of either ofthose things, ought the Registrar exercise the discretion toprohibit the respondent in all the circumstances.e) Where prohibition is appropriate, what is the appropriate term.[46] In this case, adapting Miller J's steps to the facts in issue here, I propose to dealwith the Deputy Registrar's decision by examining the four stages of his inquiry:(a) Was it reasonable that the companies were placed in statutorymanagement, such that they qualified under s 385(1)?(b) Was there mismanagement of the companies and if so, was it acontributing cause of the companies' qualifying status under s 385?(c) Did the Deputy Registrar err in the exercise of his discretion inprohibiting Mr Brand from being a director in these circumstances?(d) If prohibition was appropriate, what was the appropriate term?[47] I turn now to analyse the grounds of appeal under each of the above stages ofinquiry under s 385 of the Act.FIRST STAGE OF INQUIRY: QUALIFYING STATUS OF COMPANIES[48] In both his submissions to the Deputy Registrar and initially in this proceeding,Mr Brand submitted the jurisdictional threshold under s 385(1) of the Act had not beenmet, because the companies were not insolvent when the statutory managers wereappointed. At the commencement of the hearing, Mr Kersey, for Mr Brand, abandonedthat submission and reframed Mr Brand's appeal on the first issue of jurisdiction, tothree questions: why were the companies in statutory management; was theremismanagement; and was there a causal connection between the two, in whole or inpart?[49] I propose to deal with the above questions under the four stages of inquiry, setout above. Although the insolvency qualification issue was conceded by Mr Brand, Ibriefly examine that issue to show why I consider his concession was appropriate.Insolvency is not a prerequisite[50] Section 385(1) provides for a wide range of circumstances involving companyfailures, of which insolvency is one. It includes a company in respect of which astatutory manager has been appointed.23[51] A statutory manager can be appointed over the affairs of companies that arenot insolvent or where there is no imminent risk of insolvency. The Corporations(Investigation and Management) Act 1989 (CIMA), under which statutory managersare appointed, has a broad ambit:4 Application of ActThis Act applies to any corporation—(a) that is, or may be, operating fraudulently or recklessly; or(b) to which it is desirable that this Act should apply—23 Companies Act 1993, s 385(1)(e).(i) for the purpose of preserving the interests of thecorporation's members or creditors; or(ii) for the purpose of protecting any beneficiary underany trust administered by the corporation; or(iii) for any other reason in the public interest,—if those members or creditors or beneficiaries or the publicinterest cannot be adequately protected under the CompaniesAct 1993 or in any other lawful way.[52] Section 39 of that Act is also relevant, which provides for the grounds on whicha corporation can be declared to be subject to statutory management. The grounds arewider than a company being insolvent. It provides:39 Grounds on which corporation can be declared to be subject tostatutory managementThe FMA shall not make a recommendation under section 38 inrespect of a corporation unless it is satisfied on reasonable grounds—(a) that the corporation is, or may be, a corporation to which thisAct applies; and(b) that, in the case of a corporation that is, or may be, operatingfraudulently or recklessly, it is desirable that the corporationbe declared to be subject to statutory management for thepurpose of—(i) limiting or preventing the risk of further deteriorationof the financial affairs of the corporation; or(ii) limiting or preventing the carrying out, or the effectsof, any fraudulent act or activity; or(iii) enabling the affairs of the corporation to be dealt within a more orderly or expeditious way:(c) that, in the case of a corporation referred to in section 4(b), itis desirable that the corporation be declared to be subject tostatutory management for the purpose of—(i) preserving the interests of its members or creditors orbeneficiaries or the public interest; or(ii) enabling the affairs of the corporation to be dealt within a more orderly or expeditious way.[53] The CIMA legislation was introduced because, as the Minister of Justiceexplained, it was considered necessary because the predecessor regime could beapplied only "in extreme cases", where "the position of the companies concerned have deteriorated to the point at which the position is difficult or even impossible torepair."24[54] The two broad purposes of the CIMA legislation was to enable action to betaken earlier in instances when a company is, or may be, operating fraudulently orrecklessly. The second is to enable companies to be given a decent burial whenordinary remedies are inadequate.[55] In McDonald v Australian Guarantee Corp (New Zealand) Ltd, Wallace Jreinforced that the focus of CIMA was the management of companies, not theirwinding-up:25Moreover, the emphasis in Part III of the Act is on management of thecorporation or corporations. That again is a reflection of the objectives of theAct: see s 41(1) which refers to the need to preserve the interests of membersand creditors of the corporation and to protect the beneficiaries or the publicinterest. Section 41(1) also refers to the need to resolve the difficulties of thecorporation and to preserve its business as far as practicable. Thosepreservatory and protective functions are in turn reflected in the moratoriumand other provisions of Part III. There is no emphasis on the winding-up ofthe corporation.Analysis[56] I accept the Registrar's submission that s 385(1)(e) applies to the threecompanies, Aorangi, Forresters and Trust Management, which were placed intostatutory management in 2010. Under CIMA, statutory managers are appointed tocompanies that are operating recklessly, without any requirement that they are in factoperating fraudulently or are insolvent. In the case of recklessness, statutory managersmay be appointed to enable the affairs of the company to be dealt with in a moreorderly or expeditious way.26 It is also apparent that the provisions of CIMA will applyto a company to preserve the interests of the beneficiaries or the public interest.24 (13 September 1988) 492 NZPD 6494.25 McDonald v Australian Guarantee Corp (New Zealand) Ltd [1990] 1 NZLR 227 (HC) at 239.26 Corporations (Investigation and Management) Act 1989, s 39(b)(iii).[57] The policy consideration behind CIMA, as with the introduction of s 385 ofthe Act, is the protection of members, creditors, beneficiaries or the public interest,which cannot be adequately protected under the Act or in any other lawful way.27[58] Although the three qualifying companies, Aorangi, Forresters and TrustManagement were not insolvent at the time statutory management was imposed, therewere concerns about Aorangi's solvency and the way it was operated. After theappointment of statutory managers, it later became apparent that the "loans" to MrHubbard of $63.4 million were "introduced assets" by the Hubbards, not loans to them,although the Hubbards' Aorangi account was credited with the assets' value. The"introduced assets" are explained further in this judgment under the third stage of theinquiry.28 Nevertheless, it was plain from the Registrar of Companies' report to theSecurities Commission on 18 June 2010, that the Registrar believed the Hubbardswere borrowing funds from Aorangi "for which there [was] scant evidence ofsecurities."29[59] While Mr Brand is correct that Aorangi was not insolvent, there were sufficientconcerns that Aorangi was either insolvent or was trading recklessly, to warrant theimposition of statutory management, followed by Forresters and Trust Management.The Registrar concluded that Aorangi had been trading recklessly and fraudulently inbreach of the Securities Act, the Companies Act, the Financial Reporting Act, andpossibly the Crimes Act. The Registrar believed that Aorangi had placed investorfunds at risk and that it had immediate liquidity issues, specifically in relation to itsinability to meet the "at call" expectation of investors. The investigators,commissioned under the Securities Act and CIMA, on 4 June 2010 reported to theRegistrar that:30(a) Aorangi was originally a nominee or contributory mortgage companybut has transformed into a "for profit" finance company, raising fundsfrom investors and on-lending those funds to borrowers; and27 Section 4.28 At [112] of this judgment.29 Ministry of Economic Development Report from the Registrar of Companies to the SecuritiesCommission: Aorangi Securities Ltd, Forresters Nominee Co Ltd and Associated Persons (18 June2010) at 4.30 At 3.(b) Aorangi has made "loans" of approximately $134 million funded bydeposits received from 407 investors.31 The majority of loans:(i) were inadequately (if not completely) undocumented by way ofterm loan contracts or loan agreements;(ii) were currently unsecured either by way of a registered mortgageover property or a General Security Agreement over the assetsof a company; and(iii) were not authorised by the instructions given by investors (andthis alleged misappropriation of trust funds was to be referredto the SFO).[60] On that basis, Aorangi and Mr and Mrs Hubbard personally were placed intostatutory management on 20 June 2010. Three months later, on 20 September 2010,Forresters and Trust Management were also placed into statutory managementfollowing the statutory managers' recommendations to do so, because:(a) the statutory managers had de facto control of the companies but hadno ongoing guarantee of controlling Trust Management in particular,because it held most of the scrip;32(b) neither company had the benefit of a moratorium against claims byinvestors seeking assets out of the funds;(c) the record-keeping for HMF, as with the other entities in statutorymanagement, had been to a very poor standard and in the absence ofrelevant computer systems, there was a significant question as to the31 The Registrar's first report identified that there were 407 investors. It was later discovered duringthe wind-down of Aorangi that as at 20 July 2009 there were 500 investors in Aorangi. Bothfigures are referred to in this judgment.32 The First Statutory Managers' Report to the Securities Commission dated 13 August 2010 refersto the need to independently verify the "script" recorded in the name of Trust Management. Thereference in this context should be to "scrip".reliability of HMF's own records, the relevant transactions of whichoccurred through Trust Management and Forresters;(d) the nature of the record-keeping gave rise to the opportunity formismanagement and there was evidence of "phantom transactions",retrospective adjustment transactions, and incorrect statements sent toinvestors, presenting a misleading position to those investors;(e) there was no evidence of any disclosure documents, in the nature ofinvestment statements or a prospectus to investors in HMF;(f) because of the complex intermingling of transactions and lack ofaccuracy in the reporting and accounting of HMF, statutorymanagement of Forresters and Trust Management appeared to be theonly option to bring the affairs of HMF under control in an orderly andexpeditious way; and(g) the business affairs of both Forresters and Trust Management was soclosely connected with Mr Hubbard that the statutory managers wereunable to exercise their powers effectively in relation to Mr Hubbard,particularly the protection of assets for beneficiaries and the publicinterest, unless they were appointed statutory managers of bothForresters and Trust Management.[61] The Registrar reported that Forresters and Trust Management were originallyintended as special purpose companies designed for keeping clients' assets and moniesseparate, but with the intertwining or involvement of HMF, this was no longer thereality.[62] Forresters and Trust Management were placed into statutory management inSeptember 2010. In its report to the Deputy Registrar in 2013 MBIE, on behalf of theRegistrar, summarised the concerns of the liquidators that these companies were thecorporate vehicles for an otherwise unincorporated investment scheme, HMF, whichwas discovered by the statutory managers in the course of their investigations intoAorangi and was operated solely by Mr Hubbard.[63] In reviewing whether it was reasonable to place Forresters and TrustManagement into statutory management, the Deputy Registrar recorded in theDecision that they were intertwined with HMF, that there was ample evidence to showthat HMF operated in an unorthodox manner, and that there was mismanagement ofHMF. The statutory managers, following their appointment, confirmed that the twocompanies were intertwined with HMF.[64] In dealing with the submissions on the solvency of Aorangi, the DeputyRegistrar in his Decision was not satisfied that Aorangi was solvent at the time thestatutory managers were appointed. Despite that, he considered the SecuritiesCommission's recommendation to place Aorangi into statutory management wasreasonable, noting that insolvency is not a necessary requirement before s 385 can beapplied.Conclusion[65] The Deputy Registrar was correct in law, that insolvency was not a necessaryrequirement before s 385 could be applied to Aorangi or Forresters and TrustManagement. From the investigation undertaken, albeit that it was done over two daysonly on 8 and 9 June 2010, there was sufficient information available to theinvestigators and ultimately to the Registrar, to justify the engagement of thepreservatory and protective functions of CIMA, and to recommend that Aorangi beplaced in statutory management, followed three months later by Forresters and TrustManagement.[66] The Registrar's identification of the legislative and regulatory breaches byAorangi and the extent of the loans and investments raised a genuine concern that theinterests of the investors needed to be preserved and protected at the time.[67] There was a misunderstanding by the Registrar in 2010 of the nature of all the"loans", because $63.4 million were the introduced assets by – not loans to – MrHubbard.33 However, the fact remained that Aorangi was not compliant with theregulatory legislation, there were no formal investment authorities signed by investors,and no disclosure declarations of Mr Hubbard's conflict of interest in the entities whichhe controlled and into which he placed investments. It was evident in June 2010 thatMr Hubbard was the managing partner, on whom the other partners/directors relied.[68] I consider that the Deputy Registrar's conclusion, that it was reasonable thatAorangi was placed into statutory management at that time, was not in error. Further,as the Deputy Registrar found, it was also reasonable that Forresters and TrustManagement were placed into statutory management as a result of Aorangi's statutorymanagement, because of the managers' concerns that these two companies were"corporate vehicles" for HMF, with an intertwining and mixing of investors' funds,which could not readily be identified.SECOND STAGE OF INQUIRY: CAUSAL CONNECTION BETWEENMISMANAGEMENT AND QUALIFYING COMPANY STATUS[69] Having found that the first stage of the inquiry was met, namely that there wasmore than one company with qualifying status, I turn then to consider the second stageof the inquiry under s 385(4)(b) of the Act.[70] At the commencement of the hearing, Mr Kersey for Mr Brand contended thatthe scheme of s 385 meant that Mr Brand could not be prohibited from being acompany director, if the Deputy Registrar decided that only one of the companies wasrelevantly mismanaged. Because Aorangi was not insolvent, Mr Kersey argued thatthe alleged solvency of Forresters and Trust Management removed those companiesfrom his consideration, as they were not solvent and the reason for their qualifyingstatus was the intermingling of funds with HMF. This argument was abandoned and,I consider appropriately, as there was jurisdiction under s 385(4)(a) for the Registrarto prohibit a director based on the management of a single company. This submissionand the insolvency submission were not pursued by Mr Kersey in closing.33 Discussed further in this judgment at [112].[71] Where there are two or more qualifying companies, s 385(4)(b) of the Actapplies. It provides:(4) The power conferred by subsection (3) may be exercised in relationto–(b) any person who the Registrar or the FMA is satisfied was,within a period of 5 years before a notice was given to thatperson under subsection (5) (whether that period commencedbefore or after the commencement of this section), a directorof, or concerned in, or a person who took part in, themanagement of, 2 or more companies to which this sectionapplies, unless that person satisfies the Registrar or the FMA–(i) that the manner in which the affairs of all, or all butone, of those companies were managed was notwholly or partly responsible for them beingcompanies in relation to which this section applies; or(ii) that it would not be just or equitable for the power tobe exercised.[72] The inquiry under s 385(4)(b) is twofold:(a) Was there mismanagement of the companies?(b) Was there a causal connection, in whole or in part, betweenmismanagement and the companies being placed into statutorymanagement?[73] As there are two or more qualifying companies, as here, under s 385(4)(b),there is a rebuttable presumption on Mr Brand to show that there was either nomismanagement of the companies, or that the manner in which the companies weremanaged was not a contributing cause of their qualifying status. If he succeeds inshowing that there was no causation or causal connection, the inquiry is at an end.[74] It is also not necessary to establish specific mismanagement by Mr Brandbefore s 385 can apply. It is enough, as the Deputy Registrar observed, that themismanagement occurred when he was a director.Was there mismanagement of the three companies?[75] I turn to examine whether there is mismanagement of the three companies. Ifirst examine Forresters and Trust Management together because of their intertwinedrelationship. Second, I examine Aorangi.Findings on mismanagement of Forresters and Trust Management[76] The Deputy Registrar found there was mismanagement of Forresters and TrustManagement in their general set up, their operation, and from 2006 onwards when MrBrand failed to effect change, there was continued mismanagement. Specifically, hefound:(a) Mr Brand failed to properly discharge his director's duties by leavingMr Hubbard and other partners to operate the companies withoutoverview from all of the directors;(b) the failure to have directors' meetings was one example of creating anenvironment where a director could mismanage without oversight fromthe boards of directors;(c) Mr Brand did not act in good faith when he relied on the advice of MrHubbard and Mrs Kelly, the accounts manager, as he was still requiredto discharge his duties as a director and not abdicate that responsibility;(d) the failure of Mr Brand and his fellow directors to effect change fromDecember 2006 (when they became aware of the amount of fundsreceived by Aorangi and the numbers of investors) to 2009, when heresigned as a director from Aorangi, also amounted to mismanagement;and(e) Mr Brand did not positively differentiate himself from Mr Hubbardsuch that the Deputy Registrar should not exercise his discretion toprohibit Mr Brand as a director.[77] The Deputy Registrar found that there was ample evidence to demonstrate thatHMF operated in an unorthodox manner and there was mismanagement of it.Although this was not a company or entity in which Mr Brand was involved, theRegistrar found mismanagement applied equally to Forresters and Trust Management,because they were intertwined with HMF such "that mismanagement infected themall."34 This mismanagement, including mixing funds, a mismatch between reportedand actual investments, and unreliable records, was the reason for the appointment ofstatutory managers.Mr Brand's position[78] Mr Brand submits that there was no mismanagement of Forresters and TrustManagement and the Deputy Registrar has misunderstood the nature and operationsof those companies. Trust Management was established to act as an independenttrustee for the HC partnership clients' family trusts. As such, it was a bare trusteeowner of assets held on trust for the partnership's clients. As an independent trusteecompany, Trust Management did not incur any liabilities of its own and did not haveany assets of its own. No financial accounts were prepared for Trust Management, asit did not undertake any transactions in its own right. As assets were held on bare trust,Mr Brand submits, it would be illogical for financial accounts to be prepared.[79] Mr Brand explained that Forresters was established to act as a nominee ownerof assets held on behalf of the partnership clients. Similar to Trust Management, hesays, it was a company established to hold assets as bare trustee and did not enter intofinancial transactions on its own account. Further, many accounting and legalpartnerships established such companies to enable their clients to have their assets heldin the name of such companies, as nominee owner of the clients' assets. He submitsboth the Forresters and Trust Management companies were administered and governedin the same way.[80] Mr Brand challenges the Deputy Registrar's assertion that Mr Hubbard'sinvestment management entity, HMF, which he undertook for his clients, infected bothForresters and Trust Management. Mr Brand submits this finding was a consequence34 Decision, above n 1, at [85].of the Deputy Registrar's misunderstanding of the nature and purpose of bothcompanies.[81] Mr Brand says that both companies were independent trustee companies andtheir only connection with HMF was that they provided independent trustee servicesfrom time to time for Mr Hubbard's clients, who came within "the HMF umbrella".This in turn, Mr Brand says, led to the Deputy Registrar wrongly finding that HMFwas mismanaged because there was a mismatch between reported investments andactual investments; unreliable records as to individual shareholders; and a mixing offunds.[82] Mr Brand says HMF was not a legal entity, but was a shorthand description forthe investment management that Mr Hubbard undertook for a number of his clients.Mr Hubbard traded as HMF. With some exceptions, investors provided funds to HMFfor investment, without signed authorities. The funds were placed in the Forrestersbank account. In the majority of cases, Mr Hubbard had total discretion over theinvestment of the funds.[83] Mr Brand submits that it was incorrect and overly simplistic to draw aninference that either of the companies were mismanaged on the basis that there wasmismanagement in HMF or the various operating companies/partnerships that wereowned by the two companies.Analysis[84] The reference by the Deputy Registrar to unreliable records and a mismatchbetween reported investments and actual investments was drawn from Chisholm J'sdecision in Re Forresters Nominee Co Ltd.35 This decision concerned directions tothe statutory managers of Forresters and Trust Management as to the appropriatemethod of distributing assets among the investors.[85] Chisholm J described the way in which Mr Hubbard began managinginvestments for a small number of his clients leading to what was described as HMF35 Re Forresters Nominee Co Ltd [2012] NZHC 1216.being an umbrella entity without any legal framework. The Judge noted that at thetime of the statutory managers' appointment to Aorangi initially, the statutorymanagers discovered the existence of HMF and their appointment was extended toinclude Forresters and Trust Management. After reviewing the alternative methodsfor distribution of assets, Chisholm J concluded that HMF operated as a pooledinvestment fund, not a personalised investment fund. In referring to previous cases ondistributions to investors in similar cases, Chisholm J said this:[90] Finally, there does not seem to be any proper basis for distinguishingthis case from the cases discussed earlier. Like most of those cases, this caseinvolves a mismatch between reported investments and actual investments;unreliable records as to individual shareholdings; and a mixing of funds [86] I am unable to accept Mr Brand's submission that it was incorrect for theDeputy Registrar to draw an inference that either of the companies were mismanagedbecause there was mismanagement in either HMF or the various operating companiesor partnerships that were owned by Forresters or Trust Management. It was open tothe Deputy Registrar to find that both companies were relevantly mismanaged,because their placement into statutory management was necessary to address the deepconcerns with the business of HMF.[87] It is correct that the day-to-day administration for each of these entities washandled by Mr Hubbard, as a partner of the HC partnership. The directors of TrustManagement were also partners of HC partnership, and documents executed by TrustManagement were required to be signed by two of the directors.[88] However, in Mr Hubbard's management of the companies, he received fundsfrom his clients and other members of the community for investment in HMF, withoutinvestment authorisations. Further, there were no disclosures of personal interest byMr Hubbard, when those funds were being placed into entities in which he hadsubstantial interests and/or control.[89] I uphold the Registrar's submission that the mismanagement of HMF involvedForresters and Trust Management demonstrably, because:(a) HMF maintained numerous holder accounts with the relevant registriesin the name of Forresters, or variations on this, and investments weretransferred from holder accounts into the name of Trust Management,with funds related to HMF being transferred through both companies;(b) investors provided funds to HMF for investment without specificinstructions and payments were made to Forresters;(c) Mr Hubbard bought investments in bulk, allocated them to investors byway of journal entry and charged management fees at his owndiscretion;(d) there were fundamental problems with reconciling investments withassets and the statutory managers concluded that there was a deficit ofaround $31 million;(e) the activities meant there was a failure to protect identifiable trustproperty, keep proper records and ensure proper financial statementswere prepared; and(f) in reality, the companies were intertwined with HMF. The records wereunreliable and HMF was effectively run through Forresters and TrustManagement.[90] I consider the Deputy Registrar's conclusion that there was mismanagement ofthese two companies, because Forresters and Trust Management were intertwined withHMF such that mismanagement affected them all, was justified. The Deputy Registrarwas also justified in relying both on the statutory manager's findings that the twocompanies were intertwined with HMF and on Chisholm J's determination that "thiscase involves a mismatch between reported and actual investments, unreliable recordsas to individual shareholding; and a mixing of funds."3636 Re Forresters, above n 35, at [90].Findings of mismanagement of Aorangi[91] Aorangi was a small contributory mortgage company, which became aninvestment entity throughout the early 2000s. It predominantly serviced Mr Hubbard'sclients and friends in the local community and over time it began to operate as afinance company, raising funds from investors and on-lending to borrowers.37[92] The Deputy Registrar found there was mismanagement of Aorangi, which ledit to being placed in statutory management. The Deputy Registrar's reasons were:(a) Aorangi was operating in breach of the Securities Act and FinancialReporting Act. It issued debt securities to the public without preparingan investment statement or prospectus, without appointing a trustee,and failed to prepare and file audited accounts. This meant investorswere deprived of statutory protection and independent review of MrHubbard's management.(b) Aorangi failed to register as a broker under the Securities Act(Contributory Mortgage) Regulations 1988, which would have requiredan audit of the company. An audit might have exposed that thecompany lacked robust practices. The Deputy Registrar accepted,however, that this breach was not the sole reason for Aorangi beingplaced into statutory management but was part of the matrix of factors.(c) Aorangi was not run on good governance principles and the directorsfailed to obtain an independent legal opinion as part of the process ofmonitoring and reviewing Aorangi's activities.(d) Until July 2009 investors were misled as to the nature of theirinvestments. Mr Brand and the other directors should not have let MrHubbard control investments into entities in which Mr Hubbard had acontrolling interest.37 A full description of Aorangi is at [13]–[14] of this judgment.(e) The directors, including Mr Brand, inappropriately relied on a fellowdirector, Mr Hubbard, and had little knowledge of Aorangi's activities.For example, short-term deposits were placed with finance companiesrelated to Mr Hubbard, rather than with a registered bank. This decisionwas made by Mr Hubbard, with no input from Mr Brand or the otherAorangi directors.(f) Ultimately, Mr Brand and the other directors failed to manage orsupervise the affairs of Aorangi for the period prior to 2007.Mr Brand's position[93] Mr Brand submits that the directors did not mismanage Aorangi, becauseAorangi was "carefully monitored and managed" at partners' meetings of the HCpartnership, particularly given that the partners were all directors of Aorangi.[94] Mr Brand submits there were appropriate methods for record keeping and thedirectors formed a view that a prospectus was not required to operate Aorangi. MrBrand resigned in June 2009, at the point where he felt it was necessary to do so.Analysis[95] Aorangi operated without a prospectus, as required by the Securities Act andthe Financial Reporting Act.38 The directors, including Mr Brand, considered thatAorangi did not need to issue a prospectus because the borrowing and lending camewithin the exemptions to the Securities Act.39 Mr Hubbard assured the directors, thatthe persons involved were family members or friends of Mr Hubbard and were notmembers of the public, so no prospectus was required.[96] Although Mr Brand was a director of Aorangi from 1991 to 2009, he wasunaware of the amount of the investment fund. Mr Brand relied on Mr Hubbard'sassurances that Aorangi was not in breach of the Securities Act. Because Mr Hubbard38 Securities Act 1978, s 33 (now repealed as of 1 December 2014 by s 4(1)(a) of the FinancialMarkets (Repeals and Amendments) Act 2013); and Financial Reporting Act 1993, ss 4 and 18(now repealed as of 1 April 2014 by s 54 of the Financial Reporting Act 2013).39 Securities Act 1978, ss 3(2)(a) and 5(2CBA).was an astute accountant and managing partner of Aorangi, Mr Brand and the otherpartners/directors allowed him to continue in his role and accepted his opinion, until12 December 2006, when they asked Mr Hubbard to form a separate nomineecompany for his managed funds clients, HMF.[97] From the Registrar's and investigators' 2010 reports, it was evident thatAorangi was operating as a substantial investment company, without complying withthe Securities Act, the Regulations and the Financial Reporting Act. It was a companyrun principally by Mr Hubbard, with his fellow directors/partners accepting hisassurances, that Aorangi was being properly managed and was not in breach of any ofthe legislative compliance requirements.[98] I note Mr Brand took issue with the Registrar's description of Aorangi as afinance company, as it did not raise funds from investors but operated as a nomineecompany, matching investors with funds with clients, who wished to borrow by wayof mortgage loan. Nevertheless, Aorangi was operating as a substantial investmentcompany, without a prospectus and without complying with the relevant legislation.[99] In the statutory managers' report to the Securities Commission dated 13 August2010, they reported to the Securities Commissioner that the directors told theinvestigators they knew little about HMF and acknowledged that Mr Hubbard hadbeen able to continue the management of Trust Management's affairs relating to HMF,without visibility from the other directors.[100] The Deputy Registrar reached the conclusion that Mr Brand himself did notseem to be fully aware of what was happening with Aorangi, on the basis of materialsincluding statements from fellow partners such as Mr White, the minutes of thepartners' meetings that were made available, and the reports before him.[101] I am satisfied that the operation of Aorangi as a substantial investmentcompany, Aorangi's non-compliance with regulatory requirements, together with anabsence of oversight by the fellow directors of Mr Hubbard, justified the DeputyRegistrar in finding that Aorangi was not managed by the directors appropriately andthis amounted to mismanagement. I find that the Deputy Registrar was justified in sofinding.Was there a causal connection between mismanagement and statutorymanagement?[102] I now turn to consider whether there was a causal connection betweenmismanagement of the three companies and the imposition of statutory managementon 20 June and 20 September 2010.[103] The Deputy Registrar considered each of the companies of which Mr Brandwas a director. He found there was no case for Mr Brand to answer in relation toBraebrook Properties Ltd, a related company. However, in relation to Aorangi,Forresters and Trust Management, he found their respective mismanagement was thereason for statutory management being imposed.Forresters and Trust Management[104] In relation to Forresters and Trust Management specifically, the DeputyRegistrar found they were put into statutory management because they wereintertwined with HMF.[105] Unravelling the investments from HMF, required the statutory managers toaccess and take control of Forresters and Trust Management. The inability todistinguish between HMF and the investments and assets of Forresters and TrustManagement, gave rise to the need to impose statutory management in respect of thosecompanies.[106] Mr Hubbard used both vehicles as a means of investing his own clients' fundsand to the extent that the other partners/directors were not aware of the extent of MrHubbard's arrangements, the following led to the imposition of statutory management:(a) the absence of appropriate and adequate oversight and management ofthese companies;(b) inadequate records of investments; and(c) the mixing of HMF with the companies' funds.[107] I uphold the Deputy Registrar's finding that there was a causal connectionbetween the mismanagement of Forresters and Trust Management by thepartners/directors, including Mr Brand, and the imposition of statutory management.Aorangi[108] The Deputy Registrar was not satisfied that Aorangi was solvent at the time thestatutory managers were appointed. In any event, he considered that insolvency wasnot the main focus but rather it was the five specific allegations made by MBIE againstMr Brand, of breaching directors' duties.[109] The failure of Mr Brand and his fellow directors to effect change in the periodfrom December 2006 to 2009 also amounted to mismanagement, in the DeputyRegistrar's conclusion.[110] Mr Brand submits that the mismanagement alleged in the Registrar'sprohibition report of July 2013 and sustained by the Deputy Registrar in his decision,was not the cause of the decision to impose statutory management on the companies.Even if there was mismanagement (which is denied), then statutory management wasnot a consequence of such mismanagement. Instead, Mr Brand submits statutorymanagement was a consequence of:(a) a misunderstanding of the introduced assets arrangement;(b) a rapid and flawed investigation into the affairs of Aorangi prior tostatutory management being imposed (which was then relied upon bythe Deputy Registrar); and(c) a mistaken view of Aorangi's financial position at the time statutorymanagers were appointed.[111] To understand the submission that the investigators, the Registrar and theSecurities Commission did not understand the introduced assets arrangements, it isimportant to set those arrangements out. I will therefore deal with two preliminaryissues, namely the introduced assets and Mr Brand's Serious Fraud Office interview,before addressing the allegation of directors' duties breaches.The introduced assets[112] In March 2007, the partner/directors of Aorangi reviewed the financial andgovernance position of Aorangi. Although the partners relied on Mr Hubbard'sassurance that Aorangi was compliant with the requirements of the Securities Act, afterquestioning Mr Hubbard, the partners agreed with his suggestion that Aorangi shouldeither be sold to SCF or a Trust Deed should be put in place and a prospectus issued.The partnership meeting minutes show that the partner/directors had expressedconcerns about Mr Hubbard's intentions with regard to Aorangi and were stronglyurging him to either restructure or sell it, from 2007 to 2009, when Mr Brand resigned.[113] Mr Brand resigned as a director of Aorangi on 19 June 2009, because there wasno progress being made by Mr Hubbard and he wished to take active steps to requireMr Hubbard to resolve matters. In July 2009, the partners and Mr Hubbard decidedto wind up Aorangi and progressively repay investors over a four year term. Thegeneral ledger showed that no new deposits were received from investors after June2009. From July 2009 to June 2010, Mr Brand engaged robustly with Mr Hubbard, toensure sufficient assets were realised to meet ongoing interest and pay all foreseeableprincipal repayments to Aorangi investors.[114] Following the request of the directors, Mr Hubbard introduced personal assetsinto Aorangi. He introduced the assets by way of journal entry, debiting Aorangi withthe relevant personal asset introduced and crediting his and Mrs Hubbard's Aorangiaccount with the corresponding value. The net outcome for Aorangi, given theamounts owing to Mr and Mrs Hubbard, were subordinated to investors' interests, andwere designed to significantly improve Aorangi's asset position.[115] The amount of the introduced assets sold or contributed by Mr Hubbard wereworth approximately $63.4 million. In addition, the Te Tua Charitable Trust, whichMr Hubbard operated and controlled, held a further $25.3 million worth of Aorangiassets, but it never received advances. Together, these made up $88.8 million of the$134 million loan, being 67 per cent of Aorangi's assets.[116] Mr Brand submits that the Registrar, the Securities Commission, and theMinister of Commerce all believed that Aorangi had been operating "recklessly andfraudulently" based on the following conclusions:(a) Aorangi had made loans of $134 million funded by deposits from 407investors;(b) the majority of loans had been made to Mr Hubbard; and(c) the loans were inadequately documented/secured.[117] Mr Brand submits the fundamental error was that the 67 per cent of introducedassets were not funded by deposits from investors. They were sold or introduced toAorangi by Mr and Mrs Hubbard and the "consideration" in favour of Mr and MrsHubbard was intended to be subordinated, so that they got paid last. The introductionof these assets occurred between April 2009 and March 2010.[118] Mr Brand says the perception, therefore, that Aorangi was operating recklesslyand fraudulently was on the basis that the introduced assets were loans owed to MrHubbard from investors' monies.[119] Mr Brand made representations to the Deputy Registrar, challenging theRegistrar's reports of 18 June 2010 and 24 July 2013, pointing out the error over theintroduced assets and alleging that the mistaken view of Aorangi's financial positionarose from a rapid and flawed investigation into the affairs of Aorangi, by theinvestigators in June 2010. That formed the basis for the submission by Mr Brand,both before the Deputy Registrar and at this hearing, that there was no proper basis forAorangi to be placed into statutory management in June 2010, because there weresufficient funds to meet investor demands. There was thus, he submits, nomismanagement and statutory management was not a consequence of it.[120] Although Mr Brand is correct that the investigators misunderstood the natureof the "loans" of $63.4 million out of the $134 million of assets, I consider the waythe "loans" were structured in the accounts to the Hubbards' credit, led the accountantsappointed to assist with the review of the loan files to conclude that the true borrowerof the loan was the shareholder of the entities named. In most cases, the shareholderof each of those entities was Mr Hubbard or an entity controlled by him. The financialrecords of Aorangi did not assist the investigators, in understanding the correctposition.[121] This, in turn, led to the imposition of statutory management, because of theconcerns about the position of Aorangi, the security of the investors' money, and theneed to preserve their interest. I consider this amounted to mismanagement, whichwas causative of statutory management being imposed.Serious Fraud Office interview[122] The second preliminary issue is the use of Mr Brand's SFO interview. MrBrand contested the use made of his SFO interview and the Deputy Registrar's relianceon it. The Deputy Registrar in his Decision referred to Mr Brand's surprise at thepartners' meeting on 21 July 2009, when he expressed grave concern at the numbersof the investors and the amount of the investment fund in Aorangi, during his interviewwith the SFO. Mr Brand acknowledged that in 2009, he was surprised to discover thenumber of investors, namely 500, when he thought that there was something like 20to 30 clients.40[123] The Deputy Registrar considered the submissions made by Mr Brand that theSFO interview cannot be used evidentially against him and should not have beenreferred to the Registrar in his "Prohibition Report" of 24 July 2013. Mr Brand allegesthis constituted a flawed process by the Deputy Registrar, along with other aspects ofthe s 385 inquiry.[124] The Deputy Registrar specifically observed that no Court action – althoughthreatened – was taken by Mr Brand to seek a High Court ruling on whether there had40 Decision, above n 1, at [180].been an unlawful use of the transcripts in the s 385 process. In the absence of anyruling, the Deputy Registrar was not satisfied that the interview could not be used but,in any event, although he referred to it, he did not rely on the material arising out ofthe SFO interviews.[125] Because there was other material that was provided by the Registrar in supportof his allegations in the 24 July 2013 Prohibition Report, the Deputy Registrar reliedon that material to reach the conclusions he had. The material, in his view, confirmedin large part, the content of the SFO interviews.[126] The Deputy Registrar's use of the unauthorised SFO interviews was raisedduring the hearing before me, although no formal ruling was sought that the interviewcould not be referred to or relied on. I have reviewed the reports and material providedto the Deputy Registrar by the Registrar, including Mr Brand's own "representations".I consider there was a sufficient evidential basis on which the Deputy Registrar couldmake his findings, without recourse to the SFO interview, that:(a) the Aorangi directors were surprised at the extent of the investment andthe large investor base of Aorangi;(b) the directors relied on Mr Hubbard to manage Aorangi and accepted hisassurances about its regulatory compliance; and(c) Mr Hubbard undertook tasks in his own time and at his own pace and"was reluctant to co-operate" when pressed.[127] The content of the partners' meetings and the responses by Mr Brand in hisrepresentations and material obtained from the other directors, satisfy me that theDeputy Registrar could make his findings, without reliance on the SFO material, inany event.Analysis of director's duties breaches[128] In his Decision, the Deputy Registrar focussed on five specific allegationsmade by MBIE against Mr Brand and the other Aorangi directors. The five allegationsof breaches of directors' duties were:(a) Aorangi was not operating in accordance with the Securities Act, theFinancial Reporting Act, or the Regulations;(b) a failure by the directors to maintain proper accounting records;(c) a failure by the directors to exercise care, diligence and skill;(d) misrepresentations to investors; and(e) the failure of the directors to manage or supervise the affairs of Aorangi.[129] The Deputy Registrar found that these five allegations of mismanagement wereat least partly responsible for the statutory management of Aorangi. I will deal witheach in turn.Aorangi operating in breach of the Securities Act and the Financial Reporting Act[130] The Registrar alleged that Aorangi was operating in breach of the SecuritiesAct and the Financial Reporting Act, because Aorangi was taking deposits without aprospectus and was not complying with the requirements of a finance companyaccepting deposits from the public. Because Aorangi was a company which issuedsecurities, he alleged that Aorangi should have prepared and filed audited accounts asrequired by the Financial Reporting Act. Due to this failure, the Registrar alleged thatinvestors were deprived of statutory protections and an independent review of MrHubbard's management.[131] Mr Brand challenged the allegation that Aorangi was in breach of the SecuritiesAct. He submitted to the Deputy Registrar and to this Court, that the Aorangi directorshad formed a view that a prospectus was not required because Aorangi did notapproach the public for funds and all monies received by Aorangi were from clientsof Mr Hubbard's or persons with whom he had a close personal relationship. This wasevidenced by a document describing the personal relationship Mr Hubbard had witheach of the 407 investors in Aorangi.[132] Further, Mr Brand submitted that the directors relied on Mr Hubbard'sassurances, when he was questioned regularly by the partners. Mr Hubbard wasalways adamant that he never approached anyone for funds. The Deputy Registrarrejected Mr Brand's submission.[133] The Deputy Registrar referred to the partners' meetings and in particular the22 March 2007 partners' meeting, which specifically recorded that the partners:41also recognise[d] that the operations of the company appear to breach ICANZrules relating to the handling of client funds and also the Securities Act andregulations re the taking of deposits without a prospectus.[134] The Deputy Registrar concluded that those minutes demonstrate that "at theminimum, there was concern about the legality of the operations of Aorangi and MrBrand knew that."42 The Deputy Registrar was critical of the failure of the directorsto obtain independent legal advice on whether a prospectus was required, as part of"normal and good governance" by the directors.43[135] The second allegation of non-compliance by the Registrar, was that Aorangibreached the Securities Act (Contributory Mortgage) Regulations by failing to registeras a broker under the Regulations, which would have required, among other things, anaudit of the company. The Deputy Registrar accepted the submission that this breach"was not the sole reason for Aorangi being placed in statutory management", butconsidered it was part of "the matrix of factors".44[136] Although the breach of the Contributory Mortgage Regulations is minor, Iconcur with the Deputy Registrar's view that if an auditor had been appointed incompliance with the Financial Reporting Act, there might have been a greater prospectof an independent review of Aorangi's operations and of Mr Hubbard, with better41 Decision, above n 1, at [123].42 At [123].43 At [119].44 At [130].controls and processes being put in place by the directors. I also agree that from thetime the partners raised their concerns about the legality of the operations of Aorangiin March 2007, it was incumbent on them to satisfy themselves, from independentlegal advice, that the company was compliant. As a director, the obligation to ensurethat a company is being operated in compliance with its legal and regulatoryobligations, is fundamental.[137] In this instance, the fellow partners/directors allowed Mr Hubbard to build upa substantial investment company from what began as a contributory mortgagecompany, reaching the size and magnitude of investors and investments that it did, ofwhich they were unaware until 2007. They accepted Mr Hubbard's assurance that aprospectus was not necessary but they did not know the details of the investments orthe numbers of the investors. Investments were made into companies affiliated withMr Hubbard, without the necessary conflict of interest disclosure, provision ofindependent advice or written investment authorities.[138] I consider this factor contributed to the imposition of statutory management onAorangi.Failure to maintain proper accounting records[139] Mr Brand was involved in executing documents for and on behalf of Aorangiand he contends that he maintained oversight of the transactions of Aorangi throughthis process. Further, he submits that there was an appropriate method of recordkeeping, with Aorangi's financial records contained on a standard computergeneralised ledger system called "APS" which is used by the majority of New Zealandchartered accountants. Referred to as the general ledger, it recorded all financialtransactions of Aorangi's bank account, with journal entries recorded in a journal bookupdated by Mr Hubbard and another partner, recorded electronically in thepartnership's computer system. In addition, there were hard copy files which werekept for each investor, where copies of correspondence and quarterly statements werestored.[140] The Registrar alleged that Aorangi did not maintain proper accounting records,leaving the sole control of all aspects of Aorangi to Mr Hubbard. This, he said, led tothe directors having difficulty in knowing the true financial position of the company.[141] The Deputy Registrar accepted Mr Brand's submission in part, that the reasonthe statutory managers made comments about the absence of acceptable records andfiles was due to the statutory managers mislaying 70 boxes of Aorangi files. Theywere not rediscovered until October 2012. For that reason, the Deputy Registrar didnot draw an adverse inference about the compilation and maintenance of Aorangi'saccounting records.[142] Although the ledger system contained the Aorangi financial records, there wereno records of securities, authorisations, or disclosures of Mr Hubbard's personalinterest in the entities, in which the investors' monies were placed. However, in theabsence of further evidence from the statutory managers about the missing 70 boxesand the impact that may have had on their view that there were poor accountingrecords, the Deputy Registrar was correct in deciding to give this factor little weight.Failing to exercise care, diligence and skill[143] MBIE alleged that while Mr Brand was a director, Aorangi made significantadvances to related and unrelated entities and to the Hubbards, with "no or inadequatesecurity and an apparent lack of due diligence."45 The level of unsecured relatedlending was a factor which caused Aorangi to be placed in statutory management, asthe Deputy Registrar recorded. Mr Brand disputed that the level of related lending byAorangi was as high as alleged by the Registrar, and asserted that the Registrar wasconfused or did not understand the true financial position of Aorangi, because of themistake over the introduced assets being regarded as loans.[144] However, there are three further factors, which I consider mean the DeputyRegistrar was entitled to find that mismanagement had occurred and was causative ofAorangi being placed into statutory management.45 Decision, above n 1, at [144].[145] The first is Mr Brand's difficulty in getting Mr Hubbard to agree with theschedules of investors and their investments, which Mr Brand had prepared andpresented to the partners' meeting on 28 July 2009. The Deputy Registrar referred tothe partners' meeting minutes, recording that Mr Hubbard advised "he significantlydisagreed with the schedules as tabled by Mr Brand."46 I consider the DeputyRegistrar's conclusion that if Mr Brand as a director of Aorangi was finding it difficultto clarify the extent of the investments, it was even harder for someone outside of thecompany to do so. I consider this was the position in which the statutory managerswere placed at the time of their investigation in 2010.[146] Secondly, Mr Brand accepted Aorangi had provided funding to Southbury, acompany in which Mr Hubbard had a substantial and controlling interest. Heacknowledged that Mr Hubbard often placed surplus Aorangi funds on short-termdeposit with Southbury, because it offered better security for short-term deposits thanSCF. Again, the Deputy Registrar was not in error in finding that directors of Aorangihad a duty to ensure that investment monies were prudently dealt with, when neitherSouthbury nor SCF were registered banks. Mr Hubbard had substantial interests inboth and after October 2008, neither Aorangi nor Southbury were part of theGovernment-introduced Retail Deposit Guarantee Scheme.[147] Thirdly, not only were Aorangi, Southbury, and SCF all companies controlledby Mr Hubbard, but the Aorangi directors left all the investment decisions to be madeby Mr Hubbard alone, with no input from the other directors. Mr Hubbard had a clearconflict of interest, as the Deputy Registrar observed. He required monitoring andoversight by his fellow directors.[148] The Deputy Registrar considered there was an additional and morefundamental feature why Mr Brand failed to satisfy him that he acted with duediligence and care as a director. That factor was the failure "to develop a jointly agreedpolicy as to how Aorangi was to be run."47 The Deputy Registrar alluded toThomas J's decision in Dairy Containers Ltd v NZI Bank Ltd,48 where he drew a46 Decision, above n 1, at [148].47 At [157].48 Dairy Containers Ltd v NZI Bank Ltd [1995] 2 NZLR 30 (HC) at 79.distinction between directors directing and managers managing. Thomas J held thatthe directors should establish the policy or rules that are to be implemented bymanagement and put systems in place to ensure the directors' instructions are carriedout.[149] While the setting of policies by directors for management compliance isnecessary for large corporations as in Dairy Containers, the setting of policies is notcommonplace for professional practices, such as lawyers and accountants' practices,which operate contributory mortgage companies. The more important requirement forsmaller companies, in my view, is that the directors of contributory mortgagecompanies oversee the operations of the company and its managing partner, by regularscrutiny at meetings, whether they be by partners' or directors' meetings. Thepartners/directors should ensure that:(a) valuations are obtained (where appropriate);(b) securities are robust and in place;(c) there are accounting systems to ensure investments are scrutinised andinterest is paid on time;(d) they are compliant with all regulatory and statutory requirements;(e) there is a regular and robust audit of the company;(f) the investors provide written and signed investment authorisation; and(g) conflicts of interest are declared and documented, when investmentsare being placed in companies, where a director has a controlling orbeneficial interest.[150] I consider that the setting of policies by company directors is best practice, asthe Deputy Registrar found. However, in my view, it is more important for smallerfirms and contributory mortgage companies to establish a system of consistentmonitoring by the directors of the company operations and, where applicable, a robustoversight of the actions of the managing director/partner.[151] In this case, Mr Hubbard's fellow directors allowed him to take control of theday-to-day management and did not question the lack of investment authorities or hisplacing of investments into companies in which he had a substantial interest and overwhich he had control.[152] I consider this factor was contributory to the imposition of statutorymanagement on Aorangi.Alleged misrepresentations to investors[153] In alleging this breach, the Registrar relied on the statutory managers' reportsthat investors were led to believe that their investments were either contributorymortgages or mortgage-backed securities. The Deputy Registrar recorded that, as at31 March 2009, 50 per cent of Aorangi's investments were loans to SCF, Southbury,and the Charitable Trusts, controlled by Mr Hubbard. All three were entitiesassociated with and/or controlled by Mr Hubbard.[154] The principal allegation is that there were no documents from investors, withtheir consent to invest in these companies. SCF and Southbury were placed inreceivership in 2010 and the Registrar claims that they must have been in financialdifficulty while Mr Brand was still a director of Aorangi. Further, Aorangi investors'funds were being used to shore up SCF and Southbury.[155] Mr Brand "strongly" refuted the allegation that Aorangi investor funds proppedup SCF and Southbury. After July 2009, he ensured no further deposits were beingtaken and Mr Brand and his fellow director, Mr Stark, took steps to persuade MrHubbard to introduce assets to strengthen Aorangi's financial position.[156] The Deputy Registrar accepted that after July 2009, Aorangi's financialposition was made secure, but he found it did not excuse the fact that Mr Hubbard wasmaking decisions in regard to related lending from Aorangi to the other entities overwhich he had control, when he had a clear conflict of interest.[157] Mr Brand disputed the extent to which investors were led to believe theirinvestments were backed by mortgage security on the basis that representations werenot made to most investors. However, the absence of investment authorities andrepresentations being made to some and not others, reinforces the Deputy Registrar'sconclusions that there was an absence of control of Aorangi by the directors. Whetherit was express or implied, the investors were placing their funds with a professionalaccountancy firm and its contributory mortgage company, with an expectation that theinvestments would be adequately secured.[158] I concur with the Deputy Registrar's conclusion, that whether or not there wasdocumentation from investors, the directors should not have let Mr Hubbard controlinvestments into entities in which Mr Hubbard had a controlling interest. That was afundamental lack of governance, as the Deputy Registrar found. The fact that Aorangiplaced $12.2 million with SCF meant it was dependent upon SCF paying it back whencalled upon. Both Aorangi and SCF were controlled by Mr Hubbard and there shouldhave been controls and disclosure to investors of his conflicted position.[159] The absence of investment authorities and the representation, either express orimplied, that the investments were secured by mortgage, were also contributory causesof statutory management being imposed.Allegation of failure to manage or supervise the affairs of Aorangi[160] In canvassing all of the allegations and the way in which Aorangi was operatedprincipally by Mr Hubbard, the Deputy Registrar concluded that Mr Brand had notsatisfied him for the period prior to 2007, that he properly managed and supervisedthe affairs of Aorangi. He was satisfied that this was mismanagement and was a partialreason why Aorangi was placed in statutory management. He held that if the directorsdid not properly supervise Aorangi and have a "good handle" as to what washappening, there was a likelihood that management would be forcibly taken awayfrom the directors and given to someone else.49 Nor did Mr Brand satisfy him that hecould properly rely on Mr Hubbard, when Mr Brand acknowledged that Mr Hubbard49 Decision, above n 1, at [182].was astute but difficult to deal with, in that he "resented being told what to do by hiscolleagues" and he would undertake tasks "in his own time and at his own pace."50[161] Mr Brand submits that the Deputy Registrar's view, that either there were noformal directors' meetings or that it was inappropriate that the directors' meetings wereheld as part of the partnership meetings, was out of touch with the practicalities ofgovernance, particularly where the directors were also partners of HC partnership,which was the largest accounting practice in Timaru. He says the partners questionedMr Hubbard as to the operation of Aorangi at their partners' meetings, because he wasthe primary manager and founder of Aorangi's day-to-day business.[162] In reaching his finding that Mr Brand had not satisfied him that he had properlymanaged and supervised the affairs of Aorangi, the Deputy Registrar was critical ofthe fact that there were no separate directors' meetings for the Board of Aorangi. Inhis view, if there had been separate directors' meetings, the directors would not haveallowed Mr Hubbard to have unsupervised control over Aorangi. The DeputyRegistrar considered that if Mr Brand could not effect change, particularly between2007 to 2009, and allowed Mr Hubbard to continue to do things in his own timeframe,he could have resigned. The Deputy Registrar did not accept that Mr Brand couldreasonably place reliance on Aorangi being sold to SCF, when it was in the control ofMr Hubbard, because Mr Brand was not involved in that transaction and could notcontrol it.Analysis[163] The HC partnership held regular partners' meetings and as the partnershipminutes reveal, the operation and activities of Aorangi were part of the partnershipagenda. Minutes were kept and discussions were recorded. As all the partners weredirectors of Aorangi, I do not consider the distinction to be critical, between havingformal directors' meetings of Aorangi, as opposed to formal partnership meetings, atwhich the directors of Aorangi discuss Aorangi's agenda items and business.50 Decision, above n 1, at [102].[164] The critical factor, in my view, is the reliance placed on Mr Hubbard by hisco-directors to control the operation of Aorangi, without stricter supervision and closermonitoring. It is clear that the directors, including Mr Brand, did not realise the extentof the investors and investments in Aorangi. In Mr Brand's case, he did not have anyof his clients making investments in Aorangi. The perception was that Mr Hubbardwas in control of Aorangi principally, because his clients, acquaintances and friendswere involved in investing through Aorangi into Mr Hubbard's other related entities.[165] Where one director is the managing and controlling director of a company, itis incumbent on all directors to have full knowledge of the financial position of thecompanies in which they are directors, whether they be co-partners as well as co-directors, and to subject the operation and management to regular scrutiny andmonitoring. As Miller J held in Davidson, a director must have a degree of financialliteracy, understand the fundamentals of the business, monitor performance and reviewfinancial statements regularly.51[166] Those circumstances, where partners of a professional partnership are bothdirectors and partners, with one partner often being the managing partner dealing withthe day-to-day operation of a contributory mortgage company or a company such asAorangi, were relatively common. The obligation of those fellow directors isnonetheless to check and oversee the managing partner, to ensure the company isadequately and properly managed. This includes ensuring, from an independent legalsource if necessary, that the company is operating in accordance with its legalobligations and is compliant with the relevant regulatory legislation.[167] It is evident that Mr Brand and his co-directors had little knowledge of theactivities of Aorangi. Their lack of knowledge of the financial position of Aorangi andits investors, and Mr Hubbard's complete control of Aorangi, gave little confidence tothe investigators and led to their conclusion that the management of the company wasreckless. The breach of the directors' duties to manage and supervise the affairs ofAorangi was causative of the imposition of statutory management because it became51 Davidson, above n 6, at [121], citing Australian Securities and Investment Commission v Adler[2002] NSWSC 171 at [372] where Santow J held that in accordance with a director's duty of careand diligence, directors are required to take reasonable steps to place themselves in a position toguide and monitor management of the company, including by undertaking the above.clear to the investigators and more latterly the statutory managers, that Mr Hubbardwas in control of Aorangi and his co-directors relied on Mr Hubbard's control andmanagement, without critical supervision.[168] I find no reason to interfere with the Deputy Registrar's ultimate conclusion,and I agree with it, that there was a causal connection between the mismanagement ofAorangi and the imposition of statutory management.Conclusion[169] I uphold the Deputy Registrar's findings that there was mismanagement of allthree companies. I also find there was a causal connection between mismanagementand the companies being placed into statutory management.THIRD STAGE OF INQUIRY: DISCRETION TO PROHIBIT[170] The key issue under this stage of the inquiry is whether the Deputy Registrarerred in exercising his discretion by prohibiting Mr Brand from being a director inthese circumstances.[171] The power to prohibit a director under s 385 of the Act is discretionary.52 TheDeputy Registrar was satisfied that at least one of the allegations of mismanagementwas at least partly responsible for the statutory management of at least two of thecompanies.53[172] The Deputy Registrar also considered the alternative, namely, if there was onlyone qualifying company under consideration. He was satisfied that "at least one ofthe allegations of mismanagement was at least partly responsible for the statutorymanagement of one Company."54 He noted that under either alternative, he wasentitled to exercise a broad discretion and take account of all the material referred toin his decision.52 Davidson, above n 6, at [100].53 Decision, above n 1, at [186].54 At [186].[173] His finding of causative mismanagement of the companies triggered hisdiscretion under s 385(4)(b)(ii) of the Act, to impose a period of prohibition for MrBrand, unless he was satisfied that Mr Brand was not wholly or partially responsiblefor their mismanagement or that it would not be just or equitable for the prohibitionpower to be exercised.[174] Section 385(4)(b) provides:(4) The power conferred by subsection (3) may be exercised in relationto—(b) any person who the Registrar or the FMA is satisfied was,within a period of 5 years before a notice was given to thatperson under subsection (5) (whether that period commencedbefore or after the commencement of this section), a directorof, or concerned in, or a person who took part in, themanagement of, 2 or more companies to which this sectionapplies, unless that person satisfies the Registrar or theFMA—(i) that the manner in which the affairs of all, or all butone, of those companies were managed was notwholly or partly responsible for them beingcompanies in relation to which this section applies; or(ii) that it would not be just or equitable for the power tobe exercised.[175] The Deputy Registrar found it was appropriate to impose a prohibition periodbecause Mr Brand unreservedly relied on Mr Hubbard; Mr Brand was himselfinvolved in "direct mismanagement";55 and the reasons why the companies were putin statutory management occurred during his time as a director.[176] Mr Brand submits that in determining to impose prohibition on him, theDeputy Registrar failed to take into account several relevant considerations and tookinto account several irrelevant considerations. These are dealt with further below.55 Decision, above n 1, at [188].Legal principles[177] In Davidson, Miller J found that it was convenient to address the just andequitable limb of s 385(4)(b) and the discretion to prohibit together, since the sameconsiderations arise.56 The approach of Miller J in Davidson and Thomas J in Manito the exercise of the discretion is helpful:57(a) the power to prohibit is broad and discretionary in nature;(b) like any discretionary power, it must be exercised for its statutorypurpose;(c) when exercising the power, the Registrar is not limited to conduct thatcaused the company to have qualifying status, but may also take intoaccount the individual director's attributes and conduct in office;(d) the Registrar can take into account the individual's conduct andqualities "including his or her contribution to the failure" whendeciding whether to prohibit;(f) the focus is on the individual at this stage of the Registrar's inquiry;and(g) if the actions of a director which contributed to the qualifying status ofa company cannot be identified this may lead to the decision beingquashed.[178] In the exercise of the discretionary power to prohibit a person from being adirector, the purpose and focus of s 385 must be at the forefront of such an exercise.56 Davidson, above n 6, at [119].57 At [97]–[101]; and Mani, above n 6, at [123] and [125].The purpose and focus of s 385[179] The focus of s 385 is protection of the public from unscrupulous orincompetent directors in future.58 In Davidson, Miller J found that s 385 is aimed atthose directors who, through some want of integrity, skill, judgment or industry arenot suitable directors or managers. Such directors may have also breached a director'sduties and standard of care under ss 131 to 137 of the Act, but these sections separatelyaddress an individual director's accountability to shareholders and creditors of acompany. Under s 138, a director is entitled to rely on others, in specifiedcircumstances.[180] Section 385, however, is protective and forward-looking.59 It is not adisciplinary power, although, as Miller J observed, the consequences of prohibitionmay be adverse, as "any given director inevitably experiences prohibition as apunishment".60 The inevitable consequences of prohibition, however, do not changethe purpose of prohibiting a director under s 385, which is aimed at protecting thepublic.The Deputy Registrar's exercise of discretion[181] The Deputy Registrar recorded that he had a discretion under the generalwording of s 385(4) of the Act and that under either alternative in subs (4)(b)(i) or (ii),he considered that he was entitled to exercise a broad discretion and take account ofall the material referred to in his decision. He then identified the following matters,on which he exercised his discretion to prohibit Mr Brand from being a director.61[182] He turned his mind to whether Mr Brand could be positively differentiatedfrom the other directors of the companies, and in particular Mr Hubbard. He said:62I have considered whether Mr Brand can be positively differentiated from theother directors of the companies and Mr Hubbard.58 Davidson, above n 6, at [89], [91] and [97], citing First City Corp, above n 14, at 766.59 Davidson, above n 6, at [97].60 At [91].61 Decision, above n 1, at [191], the Deputy Registrar said that: "After taking all matters into account,[I] have determined that I should not exercise my discretion." It is plain from the context of theparagraph and the Decision that he was exercising his discretion to prohibit and was not exercisingthe just and equitable power to decline to prohibit under s 385(4)(b)(ii).62 At [188].There is no doubt that Mr Brand is in a different category to Mr Hubbard andthere are positive features relating to Mr Brand's character. Also onceproblems were realised, Mr Brand (and other partners) did attempt someremedial action.[183] He then acknowledged that Mr Brand (and other partners) attempted "someremedial action," once problems were realised.63 However, he considered thatalthough statutory management occurred approximately one year after Mr Brandresigned "the root problems had their genesis in the years prior to the end of 2006."64He considered Mr Brand had no basis to "ever unreservedly rely on Mr Hubbard" andthere was "direct mismanagement" by Mr Brand, as he referred to earlier in hisdecision, although this was not specified nor explained.65[184] The Deputy Registrar reconsidered the fairness of using the SFO allegationsagainst Mr Brand, considered the matters raised in Mr Brand's submissions as to whyit would not be just or equitable to impose a period of prohibition on him andconsidered the personal circumstances of Mr Brand, as to whether they justified theexercise of his discretion. Importantly, he said of Mr Brand's submissions andpersonal circumstances:66I have considered those Submissions and some aspects are also dealt with inthe paragraphs dealing with the term of prohibition. I have also consideredwhat purpose a period of prohibition of Mr Brand would serve and what effectthat would have on him.[185] He referred to comments he made in his interim minute and supplementaryminute as being relevant, but did not specify which comments they were. After "takingall matters into account," he determined that he should not exercise his discretion todecline to prohibit, and concluded "it is appropriate to impose a period ofprohibition."67[186] The Deputy Registrar then went on to consider "a number of factors" whenfixing the term of prohibition. It was at that point, he referred to the statutory purpose63 Decision, above n 1, at [188].64 At [188].65 At [188].66 At [190].67 At [191].of s 385 and the protection of the public.68 He found there was a fundamental failureon the part of Mr Brand, from the time he chose to be a director of the companies,when he should have ensured there were policies, systems and processes in place forAorangi, to provide independent sources of information on which the directors couldrely. After canvassing a number of other matters such as his view about the failure toconduct formal directors' meetings, he made a finding of "serious mismanagement"against Mr Brand.69 In similar circumstances, he found that Mr Brand might notsubject a chief executive or fellow director to the type of processes referred to in hisdecision. Active and passive participation in mismanagement, in his view, was"largely the same".70[187] He then reminded himself that it was "equally important that a person is notprejudiced because the situation is one where there has been much media interest,"and Mr Brand should not be tainted by the collapse of SCF and the processes instigatedto manage the affairs of Mr Hubbard.71 He recorded that Mr Brand was not a directorof SCF, nor associated with it. The Deputy Registrar then imposed a period of fouryears' prohibition.The principle error[188] The question at this stage of the Deputy Registrar's inquiry, as Mr Maysubmits, is whether it would serve the statutory purpose to prohibit Mr Brand and, ifso, for what term? The starting point, therefore, for the exercise of the DeputyRegistrar's discretion to prohibit should have been the statutory purpose of s 385, asthe authorities suggest.[189] The Deputy Registrar did not consider the statutory purpose when he decidedto exercise his discretion to prohibit Mr Brand from being a director, and I find that hefell into error at this point.68 Decision, above n 1, at [192].69 At [199].70 At [199].71 At [208].[190] The factors that were considered by the Deputy Registrar in fixing the"penalty", i.e. the term of four years' prohibition, were critical to the exercise of hisdiscretion to prohibit, not just in determining the period of prohibition. It was notsatisfactory, in my view, for the Deputy Registrar to move to the penalty decision,without analysing the basis for exercising his discretion to prohibit. He failed, at thatpoint, to weigh the statutory purpose of public protection against Mr Brand's personalcircumstances and his future risk.[191] I turn now to analyse the error and the factors relevant to the exercise of thediscretion to impose prohibition, including the factors that the Deputy Registrarconsidered in imposing the term of prohibition on Mr Brand:(a) the statutory purpose of s 385 in imposing prohibition;(b) Mr Brand's role in the companies;(c) Mr Brand's role in Aorangi's wind-down; and(d) that s 385 was intended to provide a simple and swift process.Statutory purpose in imposing prohibition[192] As discussed, the three key principles from the relevant authorities are:72(a) the focus of s 385 is protection of the public from unscrupulous orincompetent directors in the future;(b) the power to prohibit under s 385 is broad and discretionary in nature;and(c) the discretionary power must be exercised for its statutory purpose.72 At [177]–[178] of this judgment.[193] The focus of the inquiry at this stage is on the individual.73 In imposingprohibition on an individual director such as Mr Brand, the Deputy Registrar mustassess the risk to the public of Mr Brand remaining a director.The risk to the public[194] In introducing the legislation, the then-Minister of Justice, the Rt Hon GeoffreyPalmer, identified that s 385 created "a speedier and more efficient means of dealingwith the problem" of directors who use "the benefits of limited-liability companies towheel and deal for their own benefit, leaving behind unpaid creditors, and companiesin financial difficulties."74[195] After the Deputy Registrar had made the finding that Mr Brand's risk "shouldbe low" and that Mr Brand was in a separate category from Mr Hubbard, it followedthat Mr Brand was not "wholly responsible" for the companies' mismanagement butmay have been partly responsible under s 385(4)(b)(i). The statutory objective shouldhave then been considered, in light of the Deputy Registrar's assessment of Mr Brand'sresponsibility. The Deputy Registrar was not satisfied Mr Brand appreciated his partin the mismanagement but there is no reasoning or analysis as to whether he found MrBrand "wholly" or "partly responsible" for the mismanagement, as s 385(4)(b)(i)requires. Mr Brand's "direct mismanagement" is not explained.[196] Alternatively, under (ii), the Deputy Registrar should have considered whetherit was just or equitable for the power of prohibition to be exercised, again in light ofthe statutory objective of public protection. The Deputy Registrar acknowledged the"major penalty of prohibition" and said he gave Mr Brand full credit for his actions in2009.75 But the reconciliation of these factors with his decision to impose prohibitionfor four years did not feature in his decision to impose prohibition.[197] Importantly, the Deputy Registrar did not consider protection of the publicwhen he decided to impose prohibition. The Deputy Registrar's consideration of thestatutory purpose was undertaken in fixing the four-year term of prohibition, after he73 At [177] of this judgment.74 (21 July 1988) 490 NZPD 5284.75 Decision, above n 1, at [131].had decided he would impose prohibition. He had already made up his mind. He thenconflated the statutory purpose of public protection with the setting of standards anddeterrence factors. The Deputy Registrar, in doing so, appears to have moved directlyinto a penalty process. He then made a finding of serious mismanagement against MrBrand personally and imposed the four-year "penalty" in respect of it, five years afterthe event. In my view, this part of the Deputy Registrar's decision appears akin to adisciplinary process, which is outside the statutory purpose of s 385.[198] In my view, if the statutory purpose of s 385 was applied in this case, a differentoutcome would have been reached. Mr Brand's reputation, his actions in securingpayment for investors, and his determination to ensure that sufficient assets weretransferred into Aorangi, involve circumstances far removed from the concern of theformer Minister of Justice. In contrast to the purpose of s 385, Mr Brand does not fitthe "wheeler and dealer" type of director, to whom the legislation was directed. Nordid he leave behind unpaid creditors and companies in financial difficulties. Thecontrary is in fact the case. Once Mr Brand realised that Mr Hubbard was notprogressing the directors' requests to separate and/or sell Aorangi, Mr Brand followedthe Davidson-approved approach, by resigning from the company. However, he didnot leave investors to their chances. He actively sought the wind-down of Aorangiand payment of the investors, as detailed below.[199] Given the purpose of s 385 when it was enacted, the statutory wording of thesection and the guidance given by Miller J in Davidson,76 the Deputy Registrar shouldhave considered s 385's focus of being protective and forward-looking in determiningto impose prohibition. His initial view, that the risk of Mr Brand repeating thecircumstances involved in these companies was low, was the most appropriate findinggiven the circumstances and the subsequent personal actions of Mr Brand.Inconsistent findings[200] I consider the Deputy Registrar's findings are also inconsistent. He acceptedthat the risk of Mr Brand "repeating the circumstances" in this case in the future was76 Davidson, above n 6, at [97].low.77 He also accepted that it was equally important that a person is not prejudicedbecause the situation is one where there has been much media interest. The DeputyRegistrar said Mr Brand should not be tainted by the collapse of SCF and the processesinstigated to manage the affairs of Mr Hubbard. As he noted, Mr Brand was not adirector of South Canterbury, nor associated with it.78[201] Consistent with the above findings, the Deputy Registrar had found that MrHubbard was "the prime reason" for the companies' mismanagement and that MrBrand was in a "different category to Mr Hubbard."79 In another part of his judgment,he said Mr Brand could not positively differentiate himself from Mr Hubbard, but didnot reconcile that finding with his other findings. There was no analysis of the reasonsfor the different findings and why, when the Deputy Registrar made a finding ofserious mismanagement against Mr Brand personally, he overlooked his findings thatMr Brand was not the prime reason for the mismanagement and was in a differentcategory to Mr Hubbard.[202] In the absence of any further analysis from the Deputy Registrar or why certainfindings were preferred over other factual findings, the basis upon which he reached aserious mismanagement finding against Mr Brand personally is unclear, and in myview, unsafe. Similarly, the Deputy Registrar found that Mr Brand's risk of repeatingthe circumstances in this case in the future should be low, yet, the Deputy Registrarmade the finding of serious mismanagement because he was concerned Mr Brandmight not subject a chief executive or fellow director to the type of processes expectedto be put in place by a director. There was no reconciliation of the two inconsistentfindings. I consider this arose from the Deputy Registrar's mistaken view that he wasrequired to determine how serious the instances of mismanagement were and whatpenalty needed to be imposed, for the sake of public protection.[203] Once the Deputy Registrar had taken that focus, I consider that led him intofurther error, by misapplying the statutory purpose to the term of prohibition andpenalty. This led him to make a finding of serious mismanagement at the end of his77 Decision, above n 1, at [193].78 At [208].79 At [188].Decision, without reference to his earlier factual findings. This, in my view,compounded the error.Mr Brand's role in the companies[204] As s 385(4)(b)(i) provides, a director may satisfy the Registrar that he or shewas not wholly or partly responsible for the manner in which the affairs of thecompany were managed. If a director can do so, the power to prohibit may not beexercised.[205] Mr Brand submits that apart from his governance role in Aorangi, hisprofessional activities were "more circumscribed" than some of his fellow partners,including Mr Hubbard and Mr Stark. He was not a director or employee of SCF. Hewas not involved in the day-to-day operations of Aorangi, but did take an activegovernance role. He was not involved in HMF, although he was indirectly involvedthrough Forresters and Trust Management. Mr Brand was and is, primarily, anaccountant.[206] Mr Brand was never paid and never received any other remuneration for hisrole as a director of Aorangi, as remuneration was solely based on the number andvalue of clients introduced to the company. He never introduced a client to Aorangi,nor arranged for a mortgage or other loan to a client from Aorangi.[207] The persons and entities involved with the three qualifying companies are setout in diagrammatic form in Appendix 2. As the diagram makes clear, Aorangi stoodalone from Forresters and Trust Management. Mr Brand was a director along with MrHubbard and three other HC partners. The shareholders were Mr and Mrs Hubbard.Their interests, however, were held by Forresters as their nominee.[208] The other two qualifying companies, Forresters and Trust Management, werethe companies used by the HC partnership as a nominee company and contributorymortgagee company respectively. The directors and shareholders comprised thepartners of HC partnership in the relevant timeframes.[209] The Deputy Registrar ultimately accepted that Mr Brand was "in a differentcategory to Mr Hubbard" in relation to the management of these companies.80 Theevidence before the Deputy Registrar was that Mr Brand did not utilise Aorangi forthe purposes of his clients' investments. Aorangi was principally operated by MrHubbard, for the purposes of his clients, friends, and investors.[210] Further, Mr Brand was not involved in HMF, although investments had beenmade by Mr Hubbard in Forresters and Trust Management, as investment vehicles forMr Hubbard's clients and friends' investments. The Deputy Registrar also acceptedthat HMF was Alan Hubbard trading as HMF and he had been operating this way since1994. He found further that there was ample evidence to show that HMF operated inan unorthodox manner and that there was mismanagement of HMF.[211] The Deputy Registrar accepted that in the course of the HMF operations,Forresters and Trust Management became involved and caught up with HMF.Importantly, however, the Deputy Registrar concluded that Mr Brand, as a director ofForresters and Trust Management, "should not be automatically held responsible forthe misdeeds of HMF."81[212] Mr Brand satisfied the Deputy Registrar that Forresters was set up to be a baretrustee nominee owner for assets held by partners and clients of HC partnership andthat Trust Management was to act as an independent trustee of clients' family trusts.He also accepted that Mr Brand personally followed specific processes when usingForresters and Trust Management.[213] The Deputy Registrar was satisfied that Mr Hubbard, as a director of Forrestersand Trust Management and the instigator of the HMF scheme, was a prime reason forthe problems faced by the two companies. The Deputy Registrar recorded that if MrBrand (and the other directors) had "positively differentiated" themselves from MrHubbard, then he had a discretion to not exercise his powers of prohibition under s385.8280 Decision, above n 1, at [188].81 At [80].82 At [188].[214] The Deputy Registrar then went on to consider that the directors of Forrestersand Trust Management did not properly discharge their directors' duties, principallyby leaving other partners in their firm to operate the companies without oversight fromall the directors. He considered that in part this was how Mr Hubbard "was able to getaway with what he did".83[215] In relation to Aorangi, the Deputy Registrar was not satisfied that Aorangi wassolvent at the time the statutory managers were appointed but in any event he wassatisfied of the specific allegations of breaches of directors' duties. He did not considerMr Brand could place reliance on Aorangi being sold to another entity, when it was inthe control of Mr Hubbard and Mr Brand was not involved in that transaction, and norcould he control it.Analysis[216] Despite the Deputy Registrar's findings that Mr Brand was in a differentcategory from Mr Hubbard and that he should not be automatically held responsiblefor the misdeeds of HMF, the Deputy Registrar focussed on the period of time from2007, when the partners required Mr Hubbard to sell or dispose of Aorangi, to 2009.He dismissed Mr Brand's reliance or ability to rely on Mr Hubbard as the in-houseexpert under s 138 of the Act, and was critical of the time it took them (and Mr Brandin particular) to require action from Mr Hubbard, despite the consistent requests fromthe partners for action from Mr Hubbard.[217] I accept Mr Brand's submission that the Deputy Registrar did not give weightto the crucial distinction between Mr Brand and Mr Hubbard. Mr Brand was notinvolved in day-to-day operations and did not promote Aorangi or introduce clients tothe business. He did not receive payment for his services as a director and his presencewas not retained, to "reassure investors", as was the case in Davidson.84 Further, theDeputy Registrar had accepted that Mr Hubbard was "a prime reason for the problemsfaced by" Forresters and Trust Management.8583 Decision, above n 1, at [88].84 Davidson, above n 6, at [130].85 Decision, above n 1, at [87].[218] Although the Deputy Registrar had found that there was no doubt that MrBrand was in a different category from Mr Hubbard, I consider he failed to giveappropriate consideration to that factor in exercising his discretion to prohibit.Mr Brand's role in the wind-down of Aorangi[219] Following the partners' meeting of 14 November 2006, in which they recordedthat Trust Management was not being used for the purposes intended, Mr Brand andthe other partner/directors sought action from Mr Hubbard to sell or otherwise disposeof Aorangi and persuaded Mr Hubbard to form a separate nominee company in placeof Trust Management. At that time, Mr Brand was a director along with other partnersof Aorangi, Forresters and Trust Management.[220] From December 2006 to 2009, Mr Hubbard was pressed for details of progressand his various proposals are recorded in the partners' meetings over that period. MrBrand described Mr Hubbard as resenting being told what to do by his colleagues andthat he would undertake tasks in his own time and at his own pace.[221] Over this period of time, Mr Hubbard was receiving regular hospital treatmentin Christchurch and although he was making proposals for effecting the changesrequested of him, progress was slow.[222] On 19 June 2009, Mr Brand resigned as director of Aorangi and Forresters.[223] The Deputy Registrar accepted, from reading the partners' minutes after MrBrand's resignation, that both Mr Brand and Mr Stark were sick and tired of beingcontinually fobbed off by Mr Hubbard. He recognised a steely determination by bothdirectors but was critical of the fact that it should have been there several years before.[224] As a result of their efforts, both Mr Brand and Mr Stark were able to get MrHubbard to introduce assets into Aorangi to the value in excess of $60 million. Thiswas undertaken to ensure that Aorangi was wound down and all investors receivedback their investment. It was successful and the investors received 99.037 cents in thedollar. At the hearing, I was informed that the investors received back their capitaland the interest that should have accrued, sometimes in capitalised form and in othersby regular payment until the final distribution.[225] The Deputy Registrar recorded that "the results were impressive" and that theintroduction of $60 million into Aorangi "was a great achievement. By this time, it isapparent that Mr Hubbard's empire was beginning to crumble."86 The DeputyRegistrar noted that Mr Hubbard needed assets to prop up other parts of his businessactivities. He then concluded:87Therefore he would not have introduced those assets into Aorangi without theconcerted efforts of Mr Brand and Mr Stark.[226] The Deputy Registrar said further:88That in turn meant those assets were available for Aorangi investors. Thatsettlement was crucial in investors eventually receiving nearly 100% of theircapital back, as was acknowledged by the statutory managers. Therefore Igive full credit to Mr Brand and Mr Stark for their actions regarding theintroduced assets.However, the Deputy Registrar did not factor this observation into his considerationas to whether to exercise his discretion to impose prohibition. One paragraph later inhis decision, the Deputy Registrar then referred to the consequences of prohibition,including the setting of standards and deterrence,89 and made a finding of seriousmismanagement against Mr Brand personally.90[227] Applying the considerations in Davidson, Mr Brand did resign when noprogress was being made and as a result of his actions, the company did not fail, butreturned to the investors "nearly 100% of their capital back", as the Deputy Registrarrecorded.91 There is a marked distinction between the facts in Davidson and here. MrDavidson was the Chair of the Board. The precarious financial position of thecompany was known to him and his fellow directors before the company collapse and86 Decision, above n 1, at [202].87 At [202].88 At [203].89 At [204].90 At [199].91 At [203].no action was taken. Despite the policies and systems that were in place, as well asthe regular directors' meetings, there was substantial loss to the investors.[228] In contrast, Mr Brand undertook several actions to ensure good investoroutcomes by:(a) stopping new deposits;(b) paying back investors;(c) strengthening the asset position by requiring the introduction of assets;and(d) winding down Aorangi so investors were repaid.[229] Rather than resigning and doing nothing further, Mr Brand achievedimpressive results, as the Deputy Registrar acknowledged, by bringing about theintroduced assets arrangements.92 Mr Brand and Mr Stark continued to press MrHubbard to introduce assets into Aorangi to ensure all investors were paid. There wasno loss to the investors as a result.[230] However, the Deputy Registrar appeared to overlook the "impressive results"achieved by Mr Brand in deciding to exercise his discretion to impose prohibition onMr Brand, five years after the companies were placed in statutory management.Although he said he gave full credit to Mr Brand and Mr Stark for their actionsregarding the introduced assets, he minimised Mr Brand's actions as "some remedialaction".93 In so doing, he overlooked that Mr Brand's actions prevented financial lossto the investors, as the Deputy Registrar made no mention of that fact in imposingprohibition.[231] As the authorities recognise, when exercising the power to prohibit, theRegistrar is not limited to conduct that caused the companies to have qualifying status,92 Decision, above n 1, at [202].93 At [203] and [188].but may also take into account the individual director's attributes, conduct andqualities, including his or her contribution to the failure, when deciding whether toprohibit.94 Despite identifying Mr Brand's impressive results and accepting that therewas a crucial distinction between Mr Brand and Mr Hubbard, I find that the DeputyRegistrar did not actually take into account these factors in his decision to imposeprohibition on Mr Brand.Rescue culture[232] I observe that Mr Brand's actions, following his resignation, appear to be at theforefront of international recognition, that a director, rather than leaving a sinking ship,should remain and responsibly manage the troubled company out of its liquidityproblems or issues arising from mismanagement. The focus is on rescuing, notpunishing. Labelled "safe harbour", such actions have recently been encouraged andupheld in Australia, following trends in the United States and United Kingdom, toensure that directors, who stay to assist in the salvaging of a company, are not unfairlypunished.95[233] Mr Kersey provided me with an Australian example of a company beingsalvaged, rather than left to become insolvent.96 In July 2012, the Australian companyDarrell Lea was put into administration. The administrator appointed, Mr Robinson,was seen as taking a "salvage approach to the company's insolvency."97 Instead ofpresiding over the dissolution of the company, Mr Robinson was praised forundertaking a modern approach to insolvency, "which is less about winding companiesup than finding innovative ways to rescue them."98 Mr Robinson has been quotedexplaining this change in approach:99We have come from a very punitive approach to insolvency, where theassumption was that directors had done something wrong and needed to bepenalised or punished And what we are moving towards is a moreinternational view, led by the US and the UK, which is more of a rescueculture.94 At [177] of this judgment.95 Tony Troiani "Safe harbour: A realignment of interests" (2018) 70(5) Governance Directions.96 Lachlan Colquhoun "International Rescue" (July 2016) Acuity 58.97 At 58.98 At 58.99 At 60.[234] Mr Brand's actions provide a valuable illustration of why this modern approachis gaining increasing recognition. His actions ensured that there was no loss to thepersons most affected, namely, the investors. The steps Mr Brand took were those ofa responsible director, who had a concern for the investors of Aorangi. In thesecircumstances, I do not consider Mr Brand should have been prohibited under s 385of the Act. He took robust steps to rescue Aorangi and acted in the best interests of itand, importantly, its investors, avoiding financial loss to them.The "loan" misunderstanding[235] There is one further matter, which was overlooked by the Deputy Registrar andfavoured Mr Brand. The Deputy Registrar accepted that the 2010 Registrar's reportcontained an error, relating to the financial position of Aorangi. The investigators andsubsequently the Registrar, misunderstood that the "loans" to Aorangi were assets.[236] The Deputy Registrar accepted there was a mistake,100 but did not factor intohis consideration, that the mistake favoured Mr Brand, because Aorangi's financialposition in 2010 was not as dire as the Registrar then believed. This factor, togetherwith the "full credit" the Deputy Registrar said he gave to Mr Brand and Mr Stark fortheir actions,101 should have been persuasive in finding that it would not be just orequitable for the power of prohibition to be exercised.Section 385 provides a simple and swift process[237] There is one further factor that is relevant. Section 385 was enacted to be asimple and swift process.102 Miller J in Davidson described s 385 as establishing "asimple and swift process, with no provision for hearing. That suggests the power hasa protective, even precautionary, purpose"103. By the time the Deputy Registrar cameto conduct this inquiry, Aorangi had been wound down and investors were paid capitaland interest. The Deputy Registrar's decision was delivered five years after statutorymanagement was imposed on the companies. There was no need for a swift or speedy100 Decision, above n 1, at [39].101 At [203].102 Davidson, above n 6, at [99(c)]; and (21 July 1988) 490 NZPD 5284.103 At [99(c)].disposition, because Mr Brand had already resigned from Aorangi and remedial actionhad been undertaken by him.[238] Although the Deputy Registrar quite properly identified breaches of director'sduties, as MBIE had reported, those breaches of director's duties were the reason forthe companies being placed into statutory management. Section 385(4)(b)(i) and (ii),however, is a different inquiry into the individual director's attributes and conduct,requiring an analysis of whether Mr Brand was wholly or partly responsible for thecompanies' mismanagement or whether it would not be just or equitable for the powerto be exercised.[239] The focus in imposing prohibition is on protection of the public in the future.On the Deputy Registrar's own findings, he concluded that the results Mr Brandachieved were "impressive" in relation to Aorangi; that Mr Brand was at low risk ofbeing in these circumstances again; that he was in a separate category to Mr Hubbard;and should not be seen to be part of HMF, or tainted by the collapse of SCF and theprocesses instigated to manage the affairs of Mr Hubbard.104 Further, the DeputyRegistrar emphasised that Mr Brand was not a director of SCF, nor associated with it.Conclusion[240] Applying the statutory purpose of s 385, I find Mr Brand does not fall into the"wheeler and dealer" category of directors and the risk to the public of his futuredirectorships, if any, "should be low" as the Deputy Registrar first found.105[241] If the Deputy Registrar had taken a protective and forward-looking view of MrBrand's attributes and conduct, in deciding whether to prohibit or not, it was evidentthere was negligible risk to the public by allowing Mr Brand to remain a director inthe future, particularly in light of his actions over the introduced assets. Mr Brand wasnot the architect of the financial investment or the establishment of what became amajor investment company, and nor was he wholly responsible for themismanagement.104 Decision, above n 1, at [202].105 At [193].[242] Mr Brand's individual conduct must be the focus of the discretion to exerciseprohibition against him, with the statutory objective of public protection being theguiding factor. The Deputy Registrar specifically said that he gave Mr Brand and hisco-director full credit for their actions regarding the introduced assets, but failed to doso when deciding to exercise his discretion to prohibit. This was an error, because theDeputy Registrar had already made up his mind to impose prohibition, before heconsidered the statutory objective of protection of the public under s 385.[243] I find that the Deputy Registrar has erred by:(a) exercising his discretion to prohibit, before he considered the statutorypurpose of s 385 and whether Mr Brand's personal circumstances poseda future risk;(b) compounding his error by moving into a consideration of penalty, andconsidering the statutory purpose of s 385 in fixing the term ofprohibition after he had decided he would impose prohibition;(c) making the specific finding of serious mismanagement against MrBrand, which is disciplinary in nature, outside the statutory purpose ofs 385, and contradicting his earlier findings that Mr Brand was in adifferent category from Mr Hubbard;(d) overlooking Mr Brand's position in the company and that he was in adifferent category from Mr Hubbard;(e) minimising Mr Brand's significant role in the wind-down of Aorangi,where he actively sought to prevent loss to the investors and wassuccessful; and(f) making inconsistent findings of fact, which were not reconciled orproviding reasons for preferring one finding over another.FOURTH STAGE OF INQUIRY: THE TERM OF PROHIBITION[244] The Deputy Registrar prohibited Mr Brand for a term of four years, from beinga director or promoter of a company, or being concerned in, or taking part (directly orindirectly) in the management of a company. As canvassed in the third stage of theinquiry, the Deputy Registrar considered a number of factors that were relevant to thediscretion to impose prohibition, as well as the precise term.[245] Given that I have found that the Deputy Registrar has erred in the exercise ofhis discretion to impose prohibition, I do not need to consider the length of the termor whether it was appropriate.[246] However, there is one issue which arises from the parties' submissions. TheDeputy Registrar compared Mr Brand's case with others, and observed that theprohibition period should be consistent with those cases which are similar to this.[247] In this hearing, the Registrar provided, through counsel, a "List of recentprohibitions," containing directors' names with their imposed prohibition periodalongside. Apart from the directors' names and their terms of prohibition, there wereno details of the facts involved, the position of the named directors in the respectivecompanies, the loss to investors or shareholders, or any other detail of the reason foreither the prohibition or the term.[248] A list of prohibition terms, without more, serves little purpose. It follows thata term of prohibition should not be an exercise in averaging other terms. The termmust be understood in relation to its factual matrix and the actions or inactions of thedirector, who has received a prohibition notice.[249] As I have found that prohibition is not to be imposed, the four-year term isconsequentially quashed.Breach of natural justice allegations[250] As part of the appeal, Mr Brand submits that the Deputy Registrar failed toobserve natural justice, on the grounds that he did not undertake an analysis of s 385(4)in accordance with Davidson; Mr Brand was denied access to documents unfairly andin breach of natural justice principles and Mr Brand was disadvantaged as a result. Iconsider that these matters formed part of the argument on appeal on the one hand andon the other, raised judicial review matters, which are not strictly relevant to the issuesto be determined in this appeal. I do not consider I need to deal with them any further.SUMMARY OF CONCLUSIONS[251] In summary, I uphold the Deputy Registrar's conclusions that:(a) Aorangi, Forresters and Trust Management companies were qualifyingcompanies under s 385 of the Companies Act.(b) Insolvency is not a prerequisite for companies to be qualifyingcompanies under s 385.(c) There was sufficient evidence to find that these three companies weremismanaged and were operating recklessly at the time the statutorymanagement was imposed.(d) The mismanagement of the three companies was causative of statutorymanagement being imposed.[252] I find, however, that the Deputy Registrar has erred in the exercise of hisdiscretion to impose prohibition on Mr Brand from being a director for four years.[253] The Deputy Registrar has erred by:(a) exercising his discretion to prohibit, before he considered the statutorypurpose of s 385 and whether Mr Brand's personal circumstances poseda future risk;(b) compounding his error by moving into a consideration of penalty, andconsidering the statutory purpose of s 385 in fixing the term ofprohibition after he had decided he would impose prohibition;(c) making the specific finding of serious mismanagement against MrBrand, which is disciplinary in nature, outside the statutory purpose ofs 385, and contradicting his earlier findings that Mr Brand was in adifferent category from Mr Hubbard;(d) overlooking Mr Brand's position in the company and that he was in adifferent category from Mr Hubbard;(e) minimising Mr Brand's significant role in the wind-down of Aorangi,where he actively sought to prevent loss to the investors and wassuccessful; and(f) making inconsistent findings of fact, which were not reconciled orproviding reasons for preferring one finding over another.Result[254] The appeal is allowed in part. The Deputy Registrar's decision prohibiting MrBrand from being a director for four years is quashed.[255] Mr Brand is entitled to costs. If the parties cannot agree on costs, memorandaare to be filed within 20 days and will be dealt with on the papers.Cull JSolicitors:Russell McVeagh, Auckland for AppellantLuke Cunningham & Clere, Wellington for RespondentAPPENDIX 1[256] Section 385 of the Companies Act is the key provision in this case. Thatsection provides:385 Registrar or FMA may prohibit persons from managingcompanies(1) This section applies in relation to a company—(a) that has been put into liquidation because of its inability topay its debts as and when they became due:(b) that has ceased to carry on business because of its inability topay its debts as and when they became due:(c) in respect of which execution is returned unsatisfied in wholeor in part:(d) in respect of the property of which a receiver, or a receiverand manager, has been appointed by a court or pursuant to thepowers contained in an instrument, whether or not theappointment has been terminated:(e) in respect of which, or the property of which, a person hasbeen appointed as a receiver and manager, or a judicialmanager, or a statutory manager, or as a manager, or toexercise control, under or pursuant to any enactment, whetheror not the appointment has been terminated:(f) that has entered into a compromise or arrangement with itscreditors:(g) that is in voluntary administration under Part 15A.(2) This section also applies in relation to a company the liquidation ofwhich has been completed whether or not the company has beenremoved from the New Zealand register.(3) The Registrar or the FMA 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, inthe management of, a company during such period not exceeding 10years after the date of the notice as is specified in the notice. Everynotice shall be published in the Gazette.(4) The power conferred by subsection (3) may be exercised in relationto—(a) any person who the Registrar or the FMA is satisfied was,within a period of 5 years before a notice was given to thatperson under subsection (5) (whether that period commencedbefore or after the commencement of this section), a directorof, or concerned in, or a person who took part in, themanagement of, a company in relation to which this sectionapplies if the Registrar or the FMA is also satisfied that themanner in which the affairs of it were managed was wholly orpartly responsible for the company being a company inrelation to which this section applies; or(b) any person who the Registrar or the FMA is satisfied was,within a period of 5 years before a notice was given to thatperson under subsection (5) (whether that period commencedbefore or after the commencement of this section), a directorof, or concerned in, or a person who took part in, themanagement of, 2 or more companies to which this sectionapplies, unless that person satisfies the Registrar or theFMA—(i) that the manner in which the affairs of all, or all butone, of those companies were managed was notwholly or partly responsible for them beingcompanies in relation to which this section applies; or(ii) that it would not be just or equitable for the power tobe exercised.(5) The Registrar or the FMA must not exercise the power conferred bysubsection (3) unless—(a) not less than 10 working days' notice of the fact that theRegistrar or the FMA intends to consider the exercise of it isgiven to the person; and(b) the Registrar or the FMA considers any representations madeby the person.(6) No person to whom a notice under subsection (3) applies shall be adirector or promoter of a company, or be concerned or take part(whether directly or indirectly) in the management of a company.(7) Where a person to whom the Registrar or the FMA has issued a noticeunder subsection (3) appeals against the issue of the notice under thisAct or otherwise seeks judicial review of the notice, the notice remainsin full force and effect pending the determination of the appeal orreview, as the case may be.(8) The Registrar or the FMA may, by notice in writing to a person towhom a notice under subsection (3) has been given,—(a) revoke that notice; or(b) exempt that person from the notice in relation to a specifiedcompany or companies.Every such notice shall be published in the Gazette.(9) Every person to whom a notice under subsection (3) is given who failsto comply with the notice commits an offence and is liable onconviction to the penalties set out in section 373(4).(10) In this section, company includes an overseas company that carrieson business in New Zealand.APPENDIX 2