Parker David: Companies and Limited Partnerships Amendment Bill — In CommitteeText is incorporated into the Bound VolumeParker David: Companies and Limited Partnerships Amendment Bill — In Committee[Sitting date: 17 June 2014. Volume:699;Page:18601. Text is incorporated into the Bound Volume.]Hon DAVID PARKER (Deputy Leader—Labour):I want to discuss with the Minister in the chair the Minister of Commerce the provision of clause 4 of the bill which inserts new section 138A into the Companies Act. It is a varied form of the offences for serious breaches of directors’ duties for which we have a Supplementary Order Paper.Before doing so can I explain why in my view these clauses are very important. We have limited partnerships and companies so as to limit the liability of investors essentially to the amounts that they invest. Otherwise were it not for those limitations and we had either partnerships or other forms of joint venture the participants in those ventures would put the whole of their legal entity’s wealth at risk in respect of what can be a relatively small investment. Accordingly without these limited liability vehicles like companies and limited partnerships capitalism does not work well because people are not willing to invest because they take too much risk in respect of a relatively small venture in respect of their other assets. Therefore they do not put them at risk money does not go round in the economy and therefore the economy does not prosper as well. That is essentially why we have limited liability companies—that and the fact that that sort of outcome can be unfair to the people involved in that they can suffer an unfair consequence in respect of their personal liability for an unincorporated venture.When people give over money through a corporate venture or as an investor in a share or in a limited partnership or when they lend money or provide services to one of those entities they put their money at risk and if the directors of the company or those who are in charge of a limited partnership act improperly they can cause a loss to either creditors or the investors. So again there has to be a line drawn as to what their liability should be and when liability should arise if those directors of these entities breach their duties in a way that causes a loss to other people.Again these lines are quite hard to draw. If we get too tough with these lines we actually do not get good people willing to act as directors and that has been one of my criticisms of recent securities law. We have actually gone too far in respect of directors’ duties and in respect of prospectus risk when they raise money from the public. The effect of this has been that the best directors who have already succeeded and whom you want to be bringing their efforts to bear for the good of the economy and to minimise risk for the people who would be investing in these new vehicles are not willing to do it because of prospectus risk. Therefore risk has actually increased because those good directors are not there and that is a worse outcome than having a lower standard of care in respect of prospectus risk for better directors because those better directors would do a better job.My concern about this provision is that it is not in respect of civil liability; it is creating criminal liability for directors in some instances. I have some difficulty with the fact that the Commerce Committee was in the position that it actually had to report back to the House saying that it thought that these provisions went too far but did not really know what the answer was. That presumably was because submissions were received by the select committee that said that the line was not being drawn in the right place but either the Government or the officials—who are you know one and the same—were not in a position to advise what the proper position was.So the select committee reported back to the House saying that it thought that “some existing conduct by directors that is not currently subject to criminal sanctions is sufficiently blameworthy to warrant criminal punishment.” but it also considered that “the new provisions in the bill would allow in certain circumstances certain conduct that is already subject to criminal sanctions to be prosecuted more directly. However we are [also] aware that the bill will be perceived by directors and their advisers to criminalise legitimate business risk-taking behaviour.”—i.e. it said it was going too far. It was going to criminalise some behaviour that should not have been criminalised and the effect of this—and the select committee said it explicitly—would be that it would have discouraged the entrepreneurial behaviour that we actually need in our country in order to prosper.So the select committee flicked the bill back to the House and said: “Although we recommend no changes other than minor drafting provisions we … support further consideration of the drafting of these new offences to ensure that the provisions are expressed in a way that provides clear guidance to directors and does not have a chilling effect on legitimate business risk-taking”. So the bill gets back to this House with the problem that was at the centre of the first substantive provision of this bill actually still not having been fixed.Then we have a Supplementary Order Paper that we are debating today that fundamentally changes the wording of the Act in a way that has not been considered at the select committee. It does this by changing the wording of one of the two arms of criminal liability and deleting the second. It completely ditches the second which was that “Every director of a company who acts or omits to act in breach of the duty in section 135 (reckless trading) commits an offence if [they] know that that conduct will result in serious loss to the company’s creditors.” That has gone. That has been ditched completely and I am not sure whether that is right or not. I suspect it is right actually but I am surprised that if that was so obviously right it was not ditched at the select committee and that the bill went to the select committee with it in in the first place. I am further surprised that if it is being ditched now the Government and the officials could not give that advice to the select committee when the bill was there recently.In respect of the first arm of these prosecutions the Government has changed it from “every director of the company who acts or omits to act in breach of section 131 (of directors to act in good faith and in best interests of the company) commits a [serious] offence if he or she knows that that conduct is seriously detrimental to the interests of the company.” It has softened that substantially so that it now reads: “A director of the company commits an offence if the director exercises powers or performs duties as a director of the company … in bad faith towards the company and believing that the conduct is not in the best interests of the company; and (b) knowing that the conduct will cause serious loss to the company.”Again I can see why the first test was too loose. I really think that was a case of how long is a piece of string. The phrase “seriously detrimental to the interests of the company” is pretty loose language. But I am questioning why it is that you have proven bad faith—they did not intend good things; they intended to act badly believing that it was not in the best interests of the company—and it seems pretty serious there. So this is deliberately bad-faith conduct and then it says that you still have to prove in addition to that that they knew that the conduct would cause serious loss to the company.I am not convinced having toughened up new section 138(1)(a) that you actually need new section 138(1)(b). In that situation where someone has acted in bad faith you have had to prove that they believed that their conduct was not in the best interests of the company and then you have still got to prove that it is serious loss. Why should you have to prove serious loss? I would have thought in that case if it was not serious loss the penalty is not going to be very high. The conduct has still been highly improper if you knew that you were acting in bad faith and you did it deliberately believing that it was not in the interests of the company. I would have thought the criminal law should have a look at that. If it was not very serious loss no prosecution is going to be brought. We have got prosecutorial guidelines and people exercise their discretion but if there is a prosecution why do you have to prove serious loss?So my question for the Minister is: do we at this stage have confidence to know that we have got it right? I have not had much confidence in this process until now given the history as I understand it from the documents. I was not on the select committee and I do know a bit about this stuff but I have not had the benefit of the submissions. I am surprised that at the Committee stage we are actually effectively fundamentally changing these clauses as they went to the select committee and as they came back from the select committee. I would ask the Minister to address why that was necessary and secondly to address why it is once you have proved bad faith and knowledge that the conduct was not in the best interests of the company that you have to prove serious loss rather than just letting that go to the criminal justice system. If it is not a serious loss then obviously the penalty is not going to be very high.Dr David Clark: I am happy for the Minister to take a call first if he wishes to address those issues but otherwise I will take a call Mr Chairperson.