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A Victory For Company Directors You Can Rely On Expert Advice

With more company directors being held personally accountable for their actions, the recent Feltex decision is welcome. This decision gives directors some certainty that if they act in good faith and make proper enquiry, they should be able to rely on expert advice from their employees and professional advisors.

The Feltex case (Ministry of Economic Development v Feeney and Others) addressed the director’s duty under section 36A of the Financial Reporting Act 1993 (FRA) to ensure that the financial statements of a reporting entity comply with the applicable reporting standards, and a director’s right under section 138 of the Companies Act 1993 to rely on expert advice.

While this decision related to professional directors of a major corporation, the fundamental principles arising out of it will also apply to directors of smaller businesses.

The Allegations

Five directors of Feltex Carpets Limited faced two charges under section 36A of the FRA. The charges related to Feltex’s 31 December 2005 interim accounts, which did not disclose breaches by Feltex of various obligations under certain facility agreements and, did not classify the amounts owing under those facilities as a current liability. At the time the accounts were prepared, Feltex was transitioning to the new International Financial Reporting Standards (IFRS).

The Defence

The directors relied on section 40 of the FRA, which enables directors to avoid liability under section 36A if they can prove they took all reasonable and proper steps to ensure that they complied with that section. They claimed they had taken all reasonable and proper steps to ensure a smooth transition to the new IFRS by:

Engaging a reputable accounting firm to assess the new IFRS and identify the areas that had to be addressed in the changeover;
Employing a qualified and well resourced financial management team to review the IFRS as they applied to Feltex;
Obtaining declarations from Feltex’s CFO and CEO that the FRA had been complied with; and
Engaging the same accounting firm to review the interim accounts to ensure compliance with the IFRS.

Gary Simpson is a partner of Simpson Western, specialising in Trust formation and administration.
www.simpsonwestern.co.nz