Directors’ Continuous Disclosure Obligations

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Financial Markets Authority v CBL Corporation Limited (In Liquidation) [2023] NZHC 3842

In a recent High Court decision, CBL Corporation Ltd (CBLC) and four of its former directors – Sir John Wells (chairman of the board of directors), Tony Hannon, Paul Donaldson, and Ian Marsh (each of whom were independent non-executive directors) – were ordered to pay pecuniary penalties relating to the making of false and misleading statements and for continuous disclosure breaches under the Financial Markets Conduct Act 2013 (Act).  The defendants had previously made admissions of liability in relation to contraventions of the Act in a settlement agreement entered into with the FMA in May 2023, so the focus of the hearing was on the level of the imposed penalties.

Background

Between October 2015 and February 2018, CBLC was dual listed with the NZX and ASX.  Its primary operating subsidiary was CBL Insurance Limited (CBLI), which predominately provided reinsurance.  As a listed issuer, CBLC was required to comply with the NZX Main Board/Debt Marketing Rules.  CBLI was also regulated as a licensed insurer by the Reserve Bank of New Zealand and at all material times held a license under the Insurance (Prudential Supervision) Act 2010.  This meant it was subject to various prudential requirements including the need to meet certain minimum regulatory solvency levels and to provide regular reporting to the Reserve Bank on its solvency and levels of reserves.

CBLI was placed into interim liquidation in February 2018, and went into full liquidation in November 2018.  CBLC went into liquidation in May 2019.  The proceeding related to the alleged failure to disclose material information to the market during 2017 and 2018.  In particular, the FMA alleged that CBLC had failed to comply with its continuous disclosure obligations in the following respects:

  • Between August 2017 and January 2018, CBLC failed to disclose that CBLI would need to materially strengthen its reserves – this information being material information that was not generally available to the market.

  • CBLC failed to disclose the existence and impact of aged receivables.

  • CBLC failed to disclose conditions which had been imposed by the Central Bank of Ireland on another subsidiary, CBL Insurance Europe DAC.

The FMA also alleged that CLBC had engaged in misleading and deceptive conduct in relation to a market announcement in August 2017 relating to the strength of its reserves.

Pecuniary Penalties

Prior to the hearing, CBLC and the directors made admissions of liability regarding contraventions of the Act.  The parties agreed to recommend the appropriate quantum of the penalties that should be imposed, while recognising that pecuniary penalties were ultimately a matter for the Court.

In his decision, Gault J outlined the three-stage approach to fixing pecuniary penalties, namely that the Court will:

  1. Determine the maximum penalty;

  2. Set a starting point in light of the relevant factors set out in section 492 of the Act; and

  3. Finally, determine any adjustment to the starting point by applying either an uplift or discount on the basis of considerations relevant to the defendant(s).

In setting the starting point, Gault J held in his judgment that “the case is the epitome of what the fair dealing provisions and continuous disclosure regime are designed to prevent” and that the breaches in this case undermine market integrity and transparency.  Gault J also found that the lack of accurate disclosures and misleading statements were prolonged and extended for a period of six months and that these continuing failures “meant investors were wholly unaware of the escalating problems at CBLC”.  Ultimately, His Honour agreed with the FMA that while the defendants’ conduct in relation to disclosure issues was not deliberate, it nevertheless was reckless or careless, especially as the defendants were senior and experienced individuals entrusted with the governance of a listed company.

Having considered the 30% discount agreed between the parties for mitigation and other factors, Gault J ordered CBLC to pay the jointly submitted penalty of $5.78 million; Sir John Wells, Paul Donaldson and Ian Marsh were each ordered to pay the submitted penalty of $1 million; and Tony Hannon was ordered to pay a submitted penalty of $1.1 million to reflect an elevated level of culpability.

Comment (Angus Wakeman)

The collapse of CBLC has generated a number of long-running proceedings in the New Zealand Courts, some of which remain ongoing.  This FMA proceeding, however, represents the first case brought under the continuous disclosure provisions of the Financial Markets Conduct Act 2013.  It demonstrates the importance of listed companies and directors complying with their fundamental obligations of continuous disclosure and fair dealing to ensure the integrity of the New Zealand capital markets, and the willingness of the FMA to hold listed companies and directors to account for breaches of these obligations, in appropriate cases.

 

Angus wakeman is a special counsel at fee langstone