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Business And Corporate Law: New Zealand Law Add in library

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Questions:

1. What are the Directors’ duties under New Zealand Law?

2. What are the shareholders rights under New Zealand Law?

3. In relation to the law of torts, discuss liability for negligent misstatements under common law and current New Zealand law?
 
 

Answer:

1. Directors’ duties under New Zealand Law

The New Zealand Companies Act, 1993 provides in details all the duties as well as the liabilities that are imposed by the law on the company directors. Generally, the duties of the director are owed directly for the company. Hence the company has the right to sue the director in the case of any breach by the director. However, along with the company the shareholders and the creditors also have the right to sue the director in case of any breach but under different sections (Chiu and Monin, 2003).

One of the primary fiduciary duties of the director is to act as an agent of the company. The directors are supposed to act as the agent who would be responsible to take actions on behalf of the company. Hence it can be construed that the relation between the director and the company is similar to that of an agent and principal. Hence accordingly the director holds a position of trust in the company.

The second most significant duty of the director is to act in good faith and that acts of the director should be in the best interest of the company. Nonetheless, there exist some obligations related to this duty of the directors. The director can exercise the given powers for the purposes specified for, the director is not allowed to use the funds of the company until he is authorized for the specific purposes. Further the director should always act in a bona fide manner. He should always act in accordance to the laws of the country that is according to the Companies Act, 1993 and also the constitution of the company. The director is also not allowed to trade in any such manner that can put the company at any serious risk and possible loss to the creditors of the company.

 

The director also has some duties with regard to the employees of the company. The director is an employer of the company it is the duty of the director to consider the interests of the employees of the company.

The director also has the duty of skill as well as care. When the director acts as the company director all the duties that he or she performs should be done with skill and care. The care, skill and diligence that the director utilizes in the performance of the duties should be similar to any other reasonable man in his place and in the same conditions would have done. However, this standard is comparatively high and while deciding on the each case the judges would consider each case differently the breach would not be considered merely based on the error in the decision (Lehman et al., 2005). During performance of the duties the director also is not supposed to display such skill that may be considered greater than what is expected from a reasonable director with the same experience and skill.

In the case of any breach by the director the shareholders have the right to sue him. Collectively, the shareholders have the right to act against the director of the company for any legitimate reason that includes the breach of duties.

2. Shareholders rights under New Zealand Law

According to the Companies Act 1993 there are a number of rights and remedies for the shareholders. These rights have been provided specifically under the laws of New Zealand.

One of the primary rights available to the shareholder is the right to be bought out. The minorities in the company who dissent can compel the company to buy the shares after they have voted against the significant transactions of the company or any vital amendments to the Constitution or any such important right that is attached to the shares (Sealy, 2003).

 

The second right available to the shareholder is the right to information. Any shareholder of a company has the right to make a written request for any important information to the company. The third right available to the shareholder is that they can claim for any inspection of any record. However, in this regard it must be noted that the records that has been asked for inspection is available in the company. The next right available to the shareholder is the right to question the management regarding any query. It is the board of directors who are to be held responsible for the management of the company. But the shareholders have the right to ask about any query to the directors regarding the management (Farrar, 2001).

The next significant right for the shareholder is to approve all the important transactions. Any company cannot enter into any transaction until and unless all the shareholders in the special resolution have approved it.

Further the shareholders have the right to sue the director. In case any breach takes place on the part of the director for any duty owed by the director, the shareholder holds the right to bring an action against the director for such breach.

Finally, the shareholder also has the right of remedy for any repressive conduct carried out by any person on behalf of the company.

Other than these rights of the shareholders, they also have the right to avoid the conditions of the Company’s Act if they take any unanimous resolution amongst the shareholders.

When the shareholders act together their rights increase and they can permit the company to obtain or trade their shares, or give financial assistance for purchasing shares or authorize the remuneration or benefits of the directors.

However, it should be remembered that the shareholders should act together to utilize these rights. Further the company needs to satisfy the solvency test and the directors have to provide a certificate for that.

The company also needs to conduct meeting annually. These meetings generally deal with financial reports, elections, director appointments and business resolutions.

 

3. Liability for negligent misstatements under common law and current New Zealand law

A negligent misstatement may be considered to be such a statement of fact that is false and made honestly but in a careless manner. An opinion may also be regarded as a statement of fact incase such an opinion implies that the person making it has reasonable grounds for such opinion (McLay, 2010). It must be noted that for negligent misstatement action can be brought only in the law of tort and such an action arises only when there existed a duty to care while making such statement of opinion and there has been a breach of such duty resulting in the damage to the claimant. With regard to the financial matters there exists no duty of care for such statements. Any person would be responsible for the negligent misstatements only when those statements were made under the conditions which made the other party rely on them. This was stated in the case of  Hedley Byrne v Heller & Partners Ltd [1964] AC 465 (HL) and also in the case of Caparo Industries plc v Dickman [1990] 2 AC 605 (HL). Under such circumstances when a negligent statement has been used to make a person enter into a contract, such a statement may be considered as actionable and a term of contract or else it may result in payment of damages (Waddams, 2010).

Under the English law, there were a number of cases which dealt with the issue of negligent misstatement. One of the oldest cases that dealt with this issue was the case of Derry v Peek (Derry v Peek, [1889]). The case was related to the tort of negligent misstatement in cases of pure economic loss. Some of the other issues in the case were fraud as has been given in contract, misrepresentation and fiduciary duty (Davies and Malkin, 2003). The House of Lords had held in this case that there existed no such duty with regard to care and skill with regard to the issuance of any prospectus to avoid the making of any misstatement and especially with regard to economic loss that results from the negligent misstatement (Dias and Markesinis, 1976).

Another English law case dealing with this issue of negligent misstatement is Hedley Byrne & Co Ltd v Heller & Partners Ltd (Hedley Byrne & Co Ltd v Heller & Partners Ltd, [1964]). This case also deals with pure economic loss which was a result of negligent misstatement. Before this case, the general idea was that any party can owe a duty for caring of statements that is made on reliance. The remedy that was previously available in such cases was in contract law (Burrows, 2007). This idea was rejected in the case and House of Lords introduced the notion of ‘assumption of responsibility’. Hence from this case onwards the liability was recognized for economic loss even if it did not arise from the contractual relationship (Witting, 2004).

 

After the decision of the House of Lords in the Hedley (Hedley Byrne & Co Ltd v Heller & Partners Ltd, [1964]) case, the courts in New Zealand also recognized these negligent misstatements. The difference in New Zealand was that the primary criterion for creating different section for liability in negligence was not mentioned here. Instead New Zealand laws preferred the principle based approach where the criteria was given but it was not considered necessary. The significance of the case in New Zealand was that in case of pure economic loss the liability did exist especially when it is caused as a result of negligent misstatement.

One recent case on negligent misstatements is Caparo Industries plc v Dickman (Caparo Industries plc v Dickman, [1990]).  It is the recent landmark case on the duty of care. In this case the House of Lords had held that for testing the presence of duty to care in negligence. The test introduced in the case was "three-fold test". According to this test, the harm that is caused must be reasonable and should be foreseen as given under Donoghue v Stevenson (Donoghue v Stevenson, [1932]). Secondly, there should be a proximal relationship between the parties and thirdly it should be fair and reasonable to impose the liability.

Laws in New Zealand for negligent misstatements are not exactly as it has been given under the English common law. In this regard, a case may be mentioned. In the case of Scott Group Ltd v McFarlane the Court of Appeal had held that in the case of any negligence to the third party the auditor may be held liable since the audit report was relied upon. The Court had further discussed that the financial position of the Company was poor and there were chances of takeover by another company (Todd and Burrows, 1991). Hence the auditors had the duty towards the company of Scott Group to reveal the truth. Nevertheless, with regard to damages the Court had held that due to the fact that the company had not suffered any financial loss, they would not be entitled to receive any damages.

It must be noted that the auditor had provided a disclaimer with regard to the exclusion of liability for the general public that included the Scott Group also. The court had held that the disclaimer was not sufficient to exclude the liability of the auditors in this regard. However, after this case, in most circumstances the disclaimers did exclude the liability to the members.

Under the laws in New Zealand, for negligent misstatement another case may be mentioned. In the case of South Pacific Manufacturing v New Zealand Securities Investigations (South Pacific Manufacturing v New Zealand Securities Investigations, [2015]), a common approach was incorporated for the determination of duty to take care under all kinds of conditions. In this kind of approach the court would ask questions with regard to the duty to take care and related inquires regarding the policies and the proximity. It has been generally observed that these claims of negligent misstatement and the ones against public authorities has been observed beyond this approach and it falls under the distinct areas of liability in negligence.

However, the contemporary decisions of the Court of Appeal have clarified all queries relating to the duty to care under novel situations which can be resolved by referring to the approach taken by the Court in South Pacific Manufacturing (South Pacific Manufacturing v New Zealand Securities Investigations, [2015]).

 

References

Burrows, A. (2007). English private law. Oxford: Oxford University Press.

Caparo Industries plc v Dickman [1990]UKHL p.2.

Chiu, P. and Monin, J. (2003). Effective Corporate Governance: from the perspective of New Zealand fund managers. Corporate Governance, 11(2), pp.123-131.

Davies, M. and Malkin, I. (2003). Torts. Chatswood, N.S.W.: LexisNexis Butterworths Australia.

Derry v Peek [1889]App Cas LR 14, p.337.

Dias, R. and Markesinis, B. (1976). The English law of torts. Brussels: E. Bruylant.

Donoghue v Stevenson [1932]AC p.562.

Farrar, J. (2001). Corporate governance in Australia and New Zealand. Melbourne: Oxford University Press.

Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964]AC p.465.

Lehman, C., Tinker, T., Merino, B. and Neimark, M. (2005). Corporate governance. Amsterdam: Elsevier JAI.

McLay, G. (2010). Torts. Wellington, N.Z.: LexisNexis NZ.

Sealy, L. (2003). Corporate Governance in Australia and New Zealand. By John Farrar. [Oxford: Oxford University Press. 2001. xxvi, 472 and (Appendices and Index) 52 pp. Paperback £33.99. ISBN 0–19–551314–2.]. The Cambridge Law Journal, 62(2), pp.511-513.

South Pacific Manufacturing v New Zealand Securities Investigations [2015]NZLR 2 (CA), p.282.

Todd, S. and Burrows, J. (1991). The Law of torts in New Zealand. North Ryde, N.S.W.: Law Book Co.

Waddams, S. (2010). The law of contracts. Aurora, Ont.: Canada Law Book Inc.

Witting, C. (2004). Liability for negligent misstatements. Oxford: Oxford University Press.

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