THE ASSISTANT REGISTRAR OF COMPANIES V KENNETH ROGER MOSES AND GARY JAMES STEVENS CA CA322/02

THE ASSISTANT REGISTRAR OF COMPANIES V KENNETH ROGER MOSES AND GARY JAMES STEVENS CA CA322/02 9 April 2003IN THE COURT OF APPEAL OF NEW ZEALAND CA322/02 CA323/02 THE ASSISTANT REGISTRAR OF COMPANIESvKENNETH ROGER MOSES GARY JAMES STEVENSHearing: 25 February 2003 Coram: Keith J McGrath J Glazebrook J Appearances: B H Dickey and T Epati for the Appellant R J Asher QC for the Respondents Judgment: 9 April 2003JUDGMENT OF THE COURT DELIVERED BY KEITH J The question[1] The respondents were charged under s59 of the Securities Act 1978 and reg 41 of the Securities Act (Contributory Mortgage) Regulations 1988. They were directors of a contributory mortgage broker, Reeves Moses Harding Mortgage Brokers Ltd, which was registered under the 1988 Regulations. The broker offered to the public contributory mortgages and managed them. The prosecutor alleges that the broker's receipt and disbursement of contributions to certain mortgagescontravened the regulations in various ways. All the informations alleged breaches by the broker and not by the directors. The prosecutor alleged however that under reg 41 the directors committed offences if the broker of which they were directors had contravened the regulations. Regulation 41 reads as follows:A broker or a director of a broker who contravenes, or fails to comply with, any provision of these regulations commits an offence, and is liable on summary conviction to a fine not exceeding $5,000.[2] Judge Hole in the District Court held that reg 41 did not impose liability on the directors of a broker simply on the basis that the broker committed the breach. The prosecutor appealed by way of case stated on two questions of law to the High Court. O'Regan J dismissed the appeal on the matter in issue before us ([2002] 3 NZLR 129) and gave leave to the prosecutor to appeal to this Court on that issue. [3] The question of law before us is stated as followsThe question for the opinion of the Court is does the reference to 'director' in Regulation 41 create criminal liability for a director of a broker which is alleged to have breached the Contributory Mortgage Regulations?The District Court and High Court Judgments[4] Judge Hole's reasons for holding that reg 41 imposed liability on a director only if the director contravened the regulations are conveniently summarised by O'Regan J who drew on the Judge's case stated:[a] He believed that the nouns 'broker' and 'director' applied alternatively to the verbs or phrases 'contravenes' and 'fails to comply with'; [b] The use of the word 'who' rather than 'which' made it more likely the interpretation referred to in paragraph [a] above was intended – if directors of corporate brokers were to be liable the Judge thought it was more likely that 'which' would be used; [c] There was nothing in the Regulations, other than Regulation 41, from which it could be ascertained that there was an intention to include personal liability on the part of directors for breaches by a corporate broker; [d] If the interpretation contended for by the Registrar were accepted, the effect would be to require directors to become personally involved in the administration of each contributory mortgageadvance. The Judge thought this would have been spelt out with greater clarity if that was the intention; [e] Sections 58 and 59 of the Securities Act make it clear that directors can be liable for certain offences committed by brokers, but those sections provide defences for directors, whereas Regulation 41 does not. It was seen as illogical to have such strict liability in regulations made pursuant to the Securities Act when the Act itself allows for directors to have defences for breaches of the Act. [f] Other provisions of the Regulations (Regulations 12, 14 and 40), impose duties on directors and this could explain why Regulation 41 referred to directors, supporting the contention that Regulation 41 dealt only with breaches by the directors themselves, not with liability of directors of a corporate broker for breaches by the broker; [g] As it was difficult to ascertain the purpose of the regulation in relation to the personal liability of directors, it was permissible to look to the common law, particularly the rule that penal statutes should be construed strictly, and the application of that rule favoured the contention that Regulation 41 did not impose personal liability on directors for breaches of corporate brokers.[5] O'Regan J did not find any assistance in [a] and [b]. He agreed however with [c] and also with [d]:[13] I agree that the requirements of the Regulations are very detailed, and that the normal expectation of a director who is not an executive of a broker, would stop well short of an active personal involvement in the administration of each advance. It is notable that in any other legislation where Parliament has placed a burden on directors in relation to a company's compliance with the requirement, the language has been significantly clearer than in the Regulations and usually there has been some defence for directors which absolves them from liability in certain circumstances.[6] He gave examples from six statutes and said this:[15] The notable feature of all of these provisions is that the intention to make directors (or others) liable for the actions of a corporate body is expressed with clarity, and there is some limitation on the criminal liability imposed on directors in circumstances where their action or inaction does not justify the imposition of a criminal sanction. That can be contrasted with Regulation 41 which, if interpreted in the way contended for by the Registrar, would impose liability on directors for the actions of corporate brokers without the same clarity and without any form of defence at all. As Mr Asher pointed out, this would mean that a director who was sick or overseas could be liable in circumstances where the director would have no realistic means of guarding against that liability. Mr Asher argued that if such a draconian regime was intended, then the intention would have been expressed more clearly. I accept that submission.[7] Judge Hole's point [e] was also supported. Sections 58 and 59 provided defences to directors (for instance on the basis of immateriality, belief in the truth of the documents, and reasonable excuse):[21] The difference in approach between ss58 and 59 on the one hand and Regulation 41 on the other, supports the argument that it cannot have been the intention of the drafters of the Regulations to impose criminal liability on the directors for all contraventions by corporate brokers of the strict requirements of the Regulations. It also adds weight to the argument previously made that one could reasonably expect a clearer statement of intention to impose criminal liability on directors for contraventions by corporate brokers without any form of defence or exception.[8] O'Regan J disagreed with Judge Hole's conclusion that the three particular provisions of the regulations imposed duties on directors themselves (point [f]). But in terms of point [g] he applied a purposive approach and considered that it was appropriate to construe the regulation strictly because of its penal nature.The argument in this Court[9] The submissions to us covered essentially the same ground as the judgments below. We would add only two points from the submission made by Mr Dickey for the appellant. He emphasised that the result of the High Court judgment was to make the phrase "a director of a broker" of no effect – on the basis, that is, that as had been held in the High Court, the regulations placed no distinct obligations on directors. But, to sustain his argument, he also accepted and submitted that directors would have a no fault defence along the lines indicated by this Court in Civil Aviation Department v MacKenzie [1983] NZLR 78. It would not be unreasonable, he submitted, if penalties were imposed on a strict liability basis. [10] We follow essentially the same headings as the courts below and, as will be seen, we are in broad agreement with much but not all of their reasoning.The words of regulation 41 in their immediate context[11] At first blush reg 41 does appear to be concerned with two different actors who may be in breach of their own distinct obligations : the broker or a director of abroker. To make the director liable for the action of the broker, the drafter would be expected to use different wording and indeed different structure. [12] Such different wording and structure were immediately available to the drafter of the regulation in s59(1) of the Act:59 Criminal liability for offering, distributing, or allotting in contravention of this Act(1) Subject to subsection (2) of this section, if an offer of a security is made to the public, or a registered prospectus relating to a security is distributed, or a security is allotted, in contravention of this Act, (or, in the case of an interest in a contributory mortgage, in contravention of regulations made under this Act),— (a) The issuer of the security; and (b) Every person who is a principal officer of the issuer at the time of the contravention; and (c) Every promoter of the security; and (d) Every person who has authorised himself to be named and is named in any advertisement or registered prospectus relating to the security as a director of the issuer or as having agreed to become a director either immediately or after an interval of time— each commits an offence, and is liable on summary conviction to a fine not exceeding $15,000. (We set the provision out as it was at the time of the alleged offence.)"Principal officer" includes a director(s2(1)). Under s59(1) directors plainly may be held liable for breaches by the broker of its obligations. No breach of a distinct obligation owed by the director need be pointed to. [13] If O'Regan J is correct and directors do not have any distinct obligation (para [8] above), with the consequence that the reference to the director in reg 41 would have no effect, the force of the argument based on the words of reg 41 and the contrast with s59 may appear to be answered. But two responses to that answer may be given. The weaker one is that some of the regulations do at least appear to place obligations on directors – those on which Judge Hole relied (regs 12(2), 14(3) and 40). The stronger answer is that reg 40 (we do not consider the other two) does impose a distinct obligation on directors:40 Persons to whom notice to be given by director of contributory mortgage broker for purposes of section 57A of the Securities Act 1978For the purposes of section 57A(2)(c) of the Securities Act 1978, every person who is a director of a contributory mortgage broker shall, upon becoming aware of any breach of these regulations, give notice of that breach to every contributor in respect of whom that breach relates.[14] Section 57A(1) places civil liability for loss or damage sustained by reason of the breach of the contributory mortgages regulations on directors of brokers, among others. Under s57A(2)(c), a director is not however liable if, among other things, on becoming aware of the breach the director gave notice of it to the District Registrar of Companies in Wellington and to any person to whom notice is required to be given under regulations made under the Act – here reg 40. O'Regan J considered that reg 40 had only the purpose of prescribing those to be notified for the purpose of s57A(2)(c) : that was indicated by the use of that phrase at the beginning of the regulation. It followed that the regulation did not impose a distinct obligation on directors. [15] On balance we consider that a distinct obligation probably is imposed. Civil and criminal liability may and do co-exist in this area of law, as in others. A failure to comply with the regulation might not in fact be the subject of civil proceedings and criminal prosecution may be the appropriate sanction. And reg 40, along with reg 41, appears under the heading "General", by contrast to the headings of the preceding groups of regulations : "Receipt and Disbursement of Contributions ByBrokers (regs 18-23); "Receipt and Disbursement of Other Money By Brokers" (regs 24-27); and "Duties of Brokers" (regs 28-39) (emphasis added). [16] We need not decide finally whether reg 40 does impose a distinct obligation on a director. It is enough that that is a real possibility and that the drafter of reg 41 may well have considered that that distinct obligation required a criminal sanction expressly applying to directors. [17] The 1988 regulations were made under s70(1) of the 1978 Act and relate in the present context to s59 (under which the respondents were also prosecuted) and to s58. Section 59(1) is set out above (para [11]). Other relevant parts of those sections are as follows:58 Criminal liability for misstatement in advertisement or registered prospectus(1) Subject to subsection (2) of this section, where an advertisement that includes any untrue statement is distributed,— (a) The issuer of the securities referred to in the advertisement, if an individual; or (b) If the issuer of the securities is a body, every director thereof at the time the advertisement is distributed— commits an offence. (2) No person shall be convicted of an offence under subsection (1) of this section if the person proves either that the statement was immaterial or that he or she had reasonable grounds to believe, and did, up to the time of the distribution of the advertisement, believe that the statement was true. (3) Subject to subsection (4) of this section, where a registered prospectus that includes an untrue statement is distributed, every person who signed the prospectus, or on whose behalf the registered prospectus was signed for the purposes of section 41(b) of this Act, commits an offence. (4) No person shall be convicted of an offence under subsection (3) of this section if the person proves either that the statement was immaterial or that he or she had reasonable grounds to believe, and did, up to the time of the distribution of the prospectus, believe that the statement was true. s59 Criminal liability for offering, distributing, or allotting in contravention of this Act (2) No person shall be convicted under subsection (1) of this section for any such contravention if— (a) The contravention was in respect of matters which in the opinion of the Court dealing with the case were immaterial, or was otherwise such as, in the opinion of the Court having regard to all the circumstances of the case, ought reasonably to be excused; or (b) In the case of a person other than the issuer, in the opinion of the Court dealing with the case, the contravention did not take place with his [or her] knowledge and consent.[18] The 1988 regulations are plainly to be read in the context of the Act under which they were made. The connection is made the closer by the fact that s59(1) includes breach of the regulations as one of the elements of the offence it creates. [19] Three features of these two sections creating criminal offences are relevant to the determination of the meaning of reg 41. They support the interpretation given by the courts below. As mentioned already, the first is the distinct and plain listing of principal officers (including directors) and directors as those who may be criminally liable because of breach of the Act or regulations without any fault by that person. That liability, to go to the second feature, is however balanced by the creation of statutory defences. The wording of these defences varies, to refer to the third feature. [20] Regulation 41 by contrast does not plainly and distinctly list the faultless directors as liable. To turn to the second and third features it does not of course include express defences. The appellant would have us imply such defences for directors if not for brokers. In the context of this legislation however the submission faces two substantial hurdles. The first is that the inclusion of a defence in the Act and its omission from a related regulation creates a strong inference that none is included in the regulations (and a possible argument that in any area of overlap the regulations might be invalid as repugnant to the Act). The second point is that the variations in the formulations, which provide wider defences than MacKenzie would, show how extremely difficult it would be for a court in particular contexts to construct defences. [21] The particular statutory context accordingly supports the interpretation adopted in the District Court and High Court. So, too, does the wider statutory context which provides an array of relevant statutory formulations.Regulation 41 in its wider statutory context[22] Many statutes over a lengthy period have imposed criminal liability on directors for breaches by their corporate body of its obligations. The statutes make it explicit that the obligations in issue are not the obligations of the directors and thatthe breach is not the director's breach. The apparently draconian character of that liability is however generally lessened by the availability of defences. In both respects, the many other provisions are like ss58 and 59 of the Securities Act. As with those provisions, the defences also recognise that directors, especially non executive directors, very properly may not have hands on involvement in the day to day affairs of the corporate body. [23] Some of the ameliorating provisions that are included do not take the form of a defence; rather they are included as elements of the offence : for instance where the body is in breach, directors and others who directed, authorised or assented to the breach are liable. That final set of provisions may be seen as imposing a distinct obligation on the directors with a consequent liability in criminal proceedings on the directors. They include the Health Act 1956 s92G (trading in blood), Building Act 1991 s82(3), Resource Management Act 1991 s340(3) and Health and Safety in Employment Act 1992 s56. There are variations even within that small group of recent statutes : in some the element of knowledge of the breach and not taking reasonable steps to prevent it extends to situations where the director could reasonably be expected to know. The provisions can be compared to the parties provision of the Crimes Act 1961 s66 which applies in general to summary proceedings; Summary Proceedings Act 1957 s3(1)(e). [24] As already appears from the provisions of the Securities Act itself variations also appear within the wording of the defence provisions. Under some the directors have a defence if they prove that the company took all reasonable and proper steps to ensure that the requirements were satisfied (eg Companies Act 1993 s376(2), Companies Re–Registration Act 1993 s17(3) and Insurance Companies (Ratings and Inspections) Act 1994 s22(2)). That legislation also recognises the appropriate role of directors by providing them with a defence if they could not reasonably be expected to take steps to ensure that the company complied. Other mitigating provisions concern only the state of mind or the actions of the director (eg Designs Act 1953 s 42(2), Patents Act 1953 s108 and Private Investigators Act 1974 s70(1)), while others, like ss58 and 59 of the Securities Act, provide a defence if the action is immaterial (eg Reserve Bank of New Zealand Act 1989 s89(5) and Securities Markets Act 1988 ss19J(2)). The broader legislative practice and context allows twoconclusions relevant to this case. They build on the conclusions reached in relation to reg 41 in the immediate context of the 1988 regulations and the 1978 Act. The first is that the legislature in a wide range of regulatory legislation relating to commercial activity and other matters, such as safety, does routinely address as a distinct matter the criminal liability of directors (and others) in the event that their companies are in breach of the law. The second is that the formulation of that liability can vary in significant ways; a court being asked to apply a mitigating element as part of the offence or as a defence would have a range of choices typically faced by a legislature rather than by a court. [25] The Courts have long recognised a MacKenzie type defence where an offence is not one of full mens rea and where the statute does not expressly preclude its availability. Absolute liability is to be imposed only by clear terms or necessary implication; Millar v MOT [1986] 1 NZLR 660, 668. No such argument is made by the appellant in this case. [26] We do not take this matter any further. It is enough for us to say that the general, as well as the particular, statutory context makes difficult the recognition of only a MacKenzie type defence. That supports the conclusion reached on other grounds that the directors are not liable under reg 41 in the circumstances of this case.The purpose of the regulations[27] But does the purpose of the regulations require that the directors should be liable in the present circumstances? We do not think so. We have little if anything to add to the discussions in the District Court and High Court. As O'Regan J says, this Court has stated the purpose in earlier cases (Re AIC Merchant Finance Ltd[1990] 2 NZLR 385, 391, and Securities Commission v Kiwi Cooperative Dairies Ltd [1995] 3 NZLR 26, 31) but there is nothing in those statements of purpose and in particular in the regulations to require that the directors be held absolutely or even strictly liable for actions by the broker for which it is liable. Rather, the meaning of reg 41 in its context and in the light of its purpose is that the broker is liable if it is inbreach of its obligations and that directors of a broker are liable if they are in breach of theirs.Conclusion[28] It follows that the appeal fails. Any question of costs may be the subject of memoranda.Solicitors: Crown Solicitor, Auckland for the Appellant Lowndes Jordon, Auckland for the Respondents