One of the reasons for using a company to operate a business is the benefit to participants – shareholders and directors – of limited or complete exclusion of liability for the conduct of the company or even for its failure and insolvency. But there are still risks of personal liability for directors and officers.
Directors and officers can be personally liable under the Companies Act for reckless trading – allowing the business of the company to be carried on in a manner likely to cause a potential risk of serious loss to the company’s creditors.
But directors and officers also face liability under the Fair Trading Act for misleading or deceptive conduct.
The Fair Trading Act has been around since 1986 and its principles are well settled. The Act is intended as a tool for consumer protection but it is also regularly used by businesses and disputes where ordinary contract law does not provide a remedy. And the Commerce Commission regularly undertakes prosecution of businesses and people for breaches of the Act.
The liability of directors and officers under the Fair Trading Act primarily arises under section 9 – “no person shall, in trade, engage in conduct that is misleading or deceptive or likely to mislead or deceive”.
Section 9 of the Fair Trading Act is now applied in New Zealand so that company directors can be personally liable for misleading or deceptive conduct in a business even with conduct was undertaken only on behalf of the company as the business owner.
The current leading case in New Zealand is Body Corporate 202254 V Taylor (2009) in the Supreme Court. This was a building dispute where it was accepted that the director concerned had overseen and closely managed allegedly substandard building work. The court held that under section 9 of the Fair Trading Act the director – as an internal agent of the business – could be personally liable for misleading conduct even though done on the half of the company as the business owner.
Potentially section 9 could apply to all company employees – not just the company and its directors and officers. The section makes no distinctions as to the level at which people operate in a company so from directors all the way through to shop assistants could be liable. But so far the New Zealand courts have limited the application of section 9 by and large to people in senior positions – and obviously directors.
The risks are high – fines under the Fair Trading Act were increased from the beginning of this year – a conviction of a director or company officer under section 9 the Fair Trading Act for deceptive or misleading conduct now carries fines of up to $200,000 and up to $600,000 for companies. Additionally courts can order compensation and refunds to those who have suffered as a result of the breach of section 9.
In October 2017 a director of a building company was prosecuted by the Commerce Commission under section 9 Fair Trading Act in the District Court and fined a total of $151,875 for misrepresenting the country of origin and brand of concrete building panels – over a period of 3 years and involving 83 building projects.
What should you do – don't assume that you are safe from Fair Trading Act prosecution just because you are a director or employee of the company. If your company is involved in risky business conduct – making false or misleading representations or potentially false or misleading representations and however well-intentioned – you should take steps to control and prevent this – or risk prosecution and a fine.