Duties and obligations of Directors and officers

Duties and obligations of Directors and officers Aviation Industry Association 2013 Aviation Week conference

Overview • Statutory duties of directors and officers • Company and commercial law • Industry Specific – Civil Aviation Act 1990 • Health and Safety in Employment Act 1992 • Easy Rider • What happened • Charges against AZ1 Enterprises Limited and Gloria Davis • Pike River • Charges against Pike River Coal Ltd and Peter Whittall • Case law on prosecution of directors • Current law reform and other initiatives www.amclegal.co.nz

Statutory obligations and duties • Companies Act 1993 • Directors must manage, or direct or supervise the management of, the business and affairs of the company: s128(1) • Statutory duties of directors: • to act in good faith and best interests of company (s131) • not to incur obligations or trade recklessly (ss135, 136) • to exercise the care, skill and due diligence expected of directors exercising their powers under the Act (s137) • Duties primarily owed to company; liquidator and creditors can also take action to enforce duties; could result in personal liability of directors • Other commercial statutes may impose specific duties giving rise to civil and/or criminal liability – eg finance company prosecutions www.amclegal.co.nz

Civil Aviation Act 1990 • Definition of operate, in relation to an aircraft, includes “cause or permit” to be operated, whether or not the person is present with the aircraft • Offence provisions in the CA Act refer to persons who “cause or permit” an aircraft to be operated in a manner causing unnecessary danger • Easy Rider case – will test extent to which these provisions can apply to the director of an operator/owner company • Aiding or abetting, being party to offences • Tax Administration Act 1994 • s148: Persons aiding or abetting offences may be prosecuted - could apply to directors – eg failure to account for PAYE • Crimes Act 1961 • s66: Parties to an offence – includes a person who does or omits an act for the purpose of aiding any person to commit an offence; or incites, counsels or procures commission of offence www.amclegal.co.nz

Health and Safety in Employment Act 1992 • Object: To promote the prevention of harm to all persons at work and other persons in, or in the vicinity of, a place of work • Duties of employersEmployers must take “all practicable steps” to ensure: • s6: The safety of employees while at work including to: • - provide a safe work environment • - ensure that plant and equipment is safe for use • - have systems to eliminate, isolate or minimise hazards • - develop procedures for dealing with emergencies • s15: That no action or inaction of any employee while at work harms any other person • s13: Duty to provide adequate training and supervision of staff www.amclegal.co.nz

Duties of principals s18: Principals must take “all practicable steps” to ensure that no contractor or subcontractor, or their employees, is harmed while working for the principal Duties of persons controlling place of work s16: Person who controls place of work must take “all practicable steps” to ensure no hazard in workplace harms person lawfully working in the workplace; Duties of employees s19: Employees must take “all practicable steps” to ensure their own safety at work; and that no action or inaction of the employee while at work causes harm to any other person www.amclegal.co.nz

No specific duties for directors or officers BUT: • s56(1) Directors, officers or agents who have “directed, authorised, assented to, acquiesced in, or participated in”, the failure of a body corporate to comply with the Act, is party to and guilty of the failure, and subject to same penalties • S56(2) Extends to directors, officers, agents or senior managers of Crown organisations • Applies whether or not the entity is prosecuted = liquidation of company does not prohibit action against directors • Contravention of above provisions by any person is an offence liable to conviction and fine of up to $250,000: s50(1) • Note – reparation orders must also be considered – Sentencing Act requirement – this may affect level of any fines imposed www.amclegal.co.nz

“All practicable steps” • s2A(1): Must take all steps to achieve a safe result that it is reasonably practicable to take in the circumstances, having regard to • The nature and severity of any injury or harm that may occur • The degree of risk or probability of injury or harm occurring • How much is known about a hazard, and any means of eliminating, isolating or minimising the hazard • The availability and cost of safeguards (weighed against the potential consequences of failing to provide those safeguards) • s2A(2): Person required to take all practicable steps – only required to take those steps in respect of circumstances that the person knows or ought reasonably to know about • Judgment of what is “reasonably practicable” will take into account common practice and knowledge within an industry www.amclegal.co.nz

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Easy Rider – what happened • Easy Rider capsized and sank in Foveaux Strait 15 March 2012, with the loss of eight lives and one survivor • TAIC Findings: • The vessel was loaded with too much weight, stacked too high • Vessel design flaws meant it had limited stability reserves • Weather forecast was for gale force winds, unsuitable for voyage • Large wave engulfed boat; caused the vessel to roll and capsize • Insufficient life jackets on board for all persons; life raft only capable of holding four people • Skipper did not hold required skippers certificate, and did not understand concept of vessel stability • Vessel was operating as commercial fishing vessel and was not authorised to carry passengers and their equipment www.amclegal.co.nz

Prosecution – AZ1 Enterprises • Maritime Transport Act 1994 • It operated the ship knowing that a maritime document was required (skippers certificate) and knowing it was not held: s68(2)(a) MTACAA equivalent: s46(1)(a) – maximum fine $100,000 • It caused or permitted the ship to be operated in a manner causing unnecessary danger or risk to the persons on board: s65(2)(a) MTACAA equivalent: s44(2)(a) – maximum fine $100,000 • Health and Safety in Employment Act 1982 • As an employer, it failed to take all practicable steps to ensure: • the safety of its employees while on board the ship: s6 and 50(1) • That no action or inaction of any employee while at work harmed any other person on board the ship: s15 and 50(1) • As principal, it failed to take all practicable steps to ensure that no contractor or subcontractor was harmed while doing work on board the ship that he was engaged to do: s18 and 50(1)Maximum fines up to $250,000 each www.amclegal.co.nz

Prosecution – Gloria Davis • Maritime Transport Act 1994 and s66 Crimes Act 1961: • She operated the ship knowing that a maritime document was required (skippers certificate) and knowing it was not held: s68(2)(a) MTA CAA equivalent: s46(1)(a) – maximum fine $10,000 • She caused or permitted the ship to be operated in a manner causing unnecessary danger or risk to the persons on board: s65(2)(a) MTACAA equivalent: s44(2)(a) – maximum fine $10,000 • Health and Safety in Employment Act 1982: • As a director, she acquiesced and participated in the failure of AZ1 Enterprises Ltd as an employer to take all practicable steps to ensure: • - the safety of its employees while on board the ship: s6 and 50(1) • - that no action or inaction of any employee while at work harmed any other person on board the ship: s15 and 50(1) • As a director, she acquiesced and participated in the failure of AZ1 Enterprises Ltd as a principal to take all practicable steps to ensure that no contractor or subcontractor was harmed: s18 and 50(1)Maximum fines up to $250,000 each www.amclegal.co.nz

Pike River prosecutions • Pike River Coal Ltd (in receivership) is awaiting sentencing for nine charges, of failing to take “all practicable steps” to ensure: • The safety of its employees: s6, s50(1) x 4 charges • The safety of its contractors, subcontractors and their employees: s18, s50(1) x 4 charges • That no action or inaction of its employees harmed another person: s15, s50(1) • Peter Whittall (CEO) is facing trial as an officer of the company, with twelve offences: • That he acquiesced or participated in the failures of Pike River Coal Ltd as an employer (x 4) and as a principal (x 4); and • That he failed as an employee to take all practicable steps to ensure that no action or inaction of his harmed another person (x 4) www.amclegal.co.nz

Case law – director prosecutions • Department of Labour v IcePak Coolstores (2009) • Fire alarm activated in coolstore • Fire brigade attended, entered and attempted to deal with source when there was an explosion – one fire fighter killed, seven injured • Company had recently changed to a hydrocarbon-based refrigerant; environmentally friendlier and cheaper, but highly inflammable • System put in place by contractor company Mobile Refrigeration Systems via its sole employee Mr Cook did not meet standards AS/NZS 1677 • No continuous ventilation system, electrical equipment not explosion proof, inadequate gas detection device, no means of eliminating all sources of ignition on detection of a leak • Explosion caused by the leaking of a hydrocarbon-based refrigerant that somehow ignited – thought to be spark within the main switchboard • IcePak Coolstores accepted its own safety systems and practices were inadequate, safety equipment available to staff was inadequate www.amclegal.co.nz

Outcome • IcePak Coolstores pleaded guilty to: • s6 failing to take all practicable steps to ensure safety of its employees while at work ($30,000 fine) • s16(3) failing to warn person other than employee or contractor of risk of hazards ($95,000 reparation; fine $3,600*) • Mobile Refrigeration Specialists pleaded guilty to: • s15 failing to take all practicable steps to ensure that no action or inaction of its employee Mr Cook while at work caused harm (reparation $175,000 and fine $56,000) • Wayne Grattan, Managing Director of IcePak, pleaded guilty to: • s56, as a director of the company he acquiesced in the failure of IcePak Coolstores to ensure the safety of its employees while at work (fine $30,000) • IcePak and Mr Grattan – offending assessed as low-medium culpability, starting point $50,00; MRS as medium-high culpability, starting point $100,000 www.amclegal.co.nz

Western Australian case • Section 19 OSH Act – employer required “so far as is practicable” to provide and maintain a working environment in which employees are not exposed to hazards • s55 OSH Act – a director, manager, secretary or other officer will also be guilty of the offence if attributable to their “consent, connivance or neglect” • Fry v Keating (2013), Western Australian Supreme Court • Mr Murrie, rigger operator, killed when pack of 16 crane components weighing over 375kg fell from a crane and struck him • D&G Cranes prosecuted for breach of s19 OSH Act. Two directors prosecuted on the basis that the breach was attributable to their neglect • Two methods had been employed for lifting the crane packs: • Method 1 – a safe and appropriate method where all parts securely encapsulated • Method 2 – unsafe method, where all parts were not secure and some at risk of falling; some riggers had been known to use this method in the past www.amclegal.co.nz

In 2004 risks of Method 2 identified and directors resolved that Method 1 should be the only method used • Evidence was that Yard Supervisor had number of administrative duties which prevented him from providing full attention to the work in the yards • In this instance, Method 2 had been used and the pack had slipped • Findings • Court found D&G Cranes failed to ensure Method 1 was in place and enforced • This omission caused Method 2 to be used • Method 2 was extremely dangerous and its use demonstrated failure of D&G Cranes, so far as practicable, to provide and maintain work environment where employees not exposed to risk of being injured or killed as a result • D&G Crane’s failure caused the death of Mr Murrie • The two directors were guilty of the offence due to their neglect in ensuring Method 1 was used at all times; appealed • Appeal to WA Supreme Court • Supreme Court said the Directors were not remote from the business; they were hands on; in those circumstances, they were neglectful in being unaware that the supervision had broken down and in failing to enforce Method 1 www.amclegal.co.nz

Appeal to WA Court of Appeal • Directors appealed on grounds that prosecution had failed to prove that they ought to have known that Method 2 was being used • Directors claimed there was a system in place to deal with unsafe work practices, including supervision by the Yard Supervisor; that they hired qualified riggers; neither director saw Method 2 being used when they visited the yard; one director was overseas at the time of the incident • Appeal failed, Appeal Court highlighted fact that: • none of the employees had a consistent, documented induction process • there was no written safe working procedure documenting Method 1 • the employees had no formal training in Method 1 • no dedicated health and safety officer • the yard supervisor’s duties required his attention away from the yard • The Court held that the directors were not entitled to assume that Method 1 was being used at all times; they had a duty to take reasonable steps to ensure that it was in fact being used www.amclegal.co.nz

Comment on implications for Easy Rider / Pike River cases • “acquiesced” not defined in HSE; not tested in IcePak due to guilty pleas; DoL’s position was the director was aware of the circumstances, was in a position to do something about it, and failed to do so • Western Australian case – took view that directors ought to have known that the safe method was not being consistently used – refer s2A HSE • In IcePak the fact that Mr Grattan was a working director was considered relevant to DoL’s assessment that he was in a position to do something about it; in the Australian case, both directors also described as “hands on” • Easy Rider - Open to interpretation how “acquiesced or participated in” will be applied to a “silent” director (assuming company found to have breached HSE Act) • Pike River – strong parallels to the facts in IcePak, regarding the reasons contributing to the explosion, and close involvement in the business; could result in liability for him as “officer” for acquiescing or participating in the breaches of the company www.amclegal.co.nz

Current law reform initiatives • Health and Safety in Employment Act • Recommendations of Pike River Commission, and work of Government Task Force on health and safety • likely to result in specific duties for directors under the HSE • likely to lead to greater enforcement of breaches by directors and officers of companies • Likely to see introduction of corporate manslaughter charge • Minister of Labour indicates he does not favour extending this to individual officers, directors or employees, but early days • Note also that individuals could be directly charged with manslaughter if causal link between death and conduct of individual(refer: R v Potts and Horrell, convicted of manslaughter of pilot due to finding of gross negligence in performing maintenance work) www.amclegal.co.nz

Other initiatives • Health and Safety in Employment guidelines • Institute of Directors and MBIE • Good Governance Practices and Guidelines for Managing Health and Safety Risks published (applies to 20+ employees) • Guidelines for smaller companies being developed • Other industry specific guidelines exist – see MBIE website • CAA – SMS initiatives currently under way – consider integrating SMS to incorporate all aspects of health and safety systems and processes • Commercial law reforms • Initiatives to introduce criminal offence provisions for breach of duties under Companies Act and Limited Partnerships Act – in particular, concerning duty not to carry on business in way that causes substantial losses to creditors; knowingly acting against best interests of company www.amclegal.co.nz

Duties and obligations of Directors and officers