Financial Markets Authority v CBL Corporation Limited (in liquidation)
[2025] NZHC 295
•26 February 2025
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-2745 [2025] NZHC 295
BETWEEN FINANCIAL MARKETS AUTHORITY
Plaintiff
ANDCBL CORPORATION LIMITED (IN LIQUIDATION)
First Defendant – DISCONTINUED
SIR JOHN WELLS
Second Defendant – DISCONTINUED
PETER ALAN HARRIS
Third Defendant – DISCONTINUED
Continued …
Hearing: 25, 26, 27 June, 1, 2, 3, 4, 5, 8, 9, 10, 11, 12, 15, 18, 23, 24, 27,
30, 31 July, 1 and 2 August 2024 (plus memoranda received on
20 and 21 August, 9 and 25 October and 1 November 2024)
Appearances: JCL Dixon KC, W R Potter, N M Blomfield, S A Comber, JEM Greer and C G Paterson for FMA
DPH Jones KC, DCS Morris and S E Cameron for C J Mulholland
Judgment: 26 February 2025
JUDGMENT OF GAULT J
This judgment was delivered by me on 26 February 2025 at 3:00 pm pursuant to r 11.5 of the High Court Rules 2016.
Registrar/Deputy Registrar
……………………………………
FINANCIAL MARKETS AUTHORITY v CBL CORPORATION LTD (IN LIQUIDATION) [2025] NZHC 295
[26 February 2025]
Continued …
ANDANTHONY CHARLES RUSSELL HANNON
Fourth Defendant – DISCONTINUED
GEOFFREY JOHN TURNER as executor of the ESTATE OF ALISTAIR LEIGHTON HUTCHISON
Fifth Defendant – DISCONTINUED
NORMAN GERALD PAUL DONALDSON
Sixth Defendant – DISCONTINUED
IAN KELVIN MARSH
Seventh Defendant – DISCONTINUEDCARDEN JAMES MULHOLLAND
Eighth Defendant
TABLE OF CONTENTS
Introduction [1]
The way the case unfolded [4]
Factual background [12]
FMCA – applicable legal principles
Contraventions [28]
Fair dealing [32]
Continuous disclosure [44]
Involvement in contraventions – accessory liability [63]
Knowledge of materiality [73]
Knowledge of safe harbours [88]
Participation / causation [103]
Summary of requirements for involvement in contravention [108]
Affirmative defences [110]
The facts and regulatory framework [113]
CBLI’s reinsurance business [121]
French construction business [122]
CBL Group’s integrated business model [131]
CBLI’s Managing General Agents [137]
Key insurance concepts
Solvency [143]
Reserving [156]
Loss ratios [162]
Importance of reserving and solvency [167]
Solvency reporting [169]
Insurance supervision in Europe [173]
Regulatory confidentiality [175]
Appointed Actuary [177]
Auditor [183]
CBL Group structure, policies and personnel
CBLC and CBLI boards of directors [185]
Audit and Financial Risk Committee [186]
Continuous Disclosure Policy and Disclosure Committee [187]
Media and Public Relations Policy [205]
Mr Harris’ management role [207]
Mr Mulholland [208]
Mr Ray [212]
Mr Clements [214]
Other senior staff [216]
CBLI's Capital Management Plan [219]
The factual chronology [222]
Samoa transaction [223]
CBLI’s Solvency Ratio – 2014 [224]
IPO [225]
Solvency return as at 30 June 2015 due 31 October 2015 [239]
SFS receivables and acquisition [241]
Reserving update [247]
SFS receivables continued [248]
2016 year-end reports [254]
European regulators’ concerns in early 2017 [260]
SFS receivables continued [265]
PwC UK report on Elite reserving [270]
First CBI direction [299]
SFS receivables update – July 2017 [308]
Reserving update – July 2017 [315]
First RBNZ direction – 25 July 2017 [317]
CBI conditions [327]
Work on 2017 half-year accounts [328]
CBLC market announcement – 18 August 2017 [388]
ARC meeting – 22 August 2017 [398]
CBLC market announcement – 24 August 2017 [423]
Solvency [431]
CBI update – August 2017 [435]
SFS receivables / solvency continued [436]
Castlerock transaction [452]
CBI update – September 2017 [457]
Castlerock / solvency / reserving continued [458]
Monthly solvency returns prepared in October 2017 [482]
Reserving update – October 2017 [506]
CBI update – October 2017 [513]
Notice of resignation [517]
Further regulatory developments – October / November 2017 [518]
PwC reserving update – November 2017 [533]
ARC meeting – 28 November 2017 [580]
Second RBNZ direction [585]
Solvency and reserving updates – November / December 2017 [586]
Board meeting with RBNZ [598]
Castlerock update – December 2017 [621]
SFS regulatory sanction [624]
Castlerock update – January 2018 [629]
Solvency update – January 2018 [633]
Third CBI direction [635]
PwC reserving update – January 2018 [645]
Third RBNZ direction [656]
30 January 2018 [657]
31 January 2018 [672]
1 February 2018 [687]
2 February 2018 [702]
3 February 2018 [713]
4 February 2018 [716]
5 February 2018 [717]
6 February 2018 [724]
7 February 2018 announcement [727]
Subsequent events [729]
One-off representation
CBLC contravention (first cause of action)
Was the representation describing the reserve increase as “one-off” misleading? [738]
Involvement (second cause of action)
Did Mr Mulholland know the representation describing the
reserve increase as “one-off” was misleading? [753]
Did Mr Mulholland intentionally participate by acts or omissions
that had a practical connection with the contravention? [759]
Section 503 defence [761]
Conclusion [762]
Non-disclosure of aged receivables
CBLC contravention (ninth cause of action)
Was CBLC aware of the alleged information? [763] Was the information not generally available to the market? [768] Would a reasonable person expect the information, if it were generally available to the market, to have a material effect on the price of
CBLC shares? [770]
Did the information relate to CBLC shares in particular rather than
to financial products generally or listed issuers generally? [774] Did any of the safe harbour exceptions to disclosure apply? [775] Immediate release? [776]
Conclusion [777]
Involvement (tenth cause of action)
Did Mr Mulholland know of the relevant information? [778]
Did Mr Mulholland know that the information was not generally
available to the market? [780]
Did Mr Mulholland know that the information was information which a reasonable person would have expected, if it were generally available
to the market, to have had a material effect on CBLC’s share price? [782]
Did Mr Mulholland know the information related to CBLC shares in particular rather than to financial products generally or listed issuers
generally? [784]
Did Mr Mulholland know that the information was not information that was exempted from disclosure by the safe harbour exceptions in
the Listing Rules that he raised? [785]
Did Mr Mulholland know that the information was not immediately
released? [787]
Did Mr Mulholland intentionally participate by acts or omissions that
had a practical connection with the contravention? [788]
Section 503 defence [794]
Conclusion [795]
Non-disclosure of Castlerock transaction
CBLC contravention (eleventh cause of action)
Was CBLC aware of the alleged information? [796] Was the information not generally available to the market? [798] Would a reasonable person expect the information, if it were generally available to the market, to have a material effect on the price of
CBLC shares? [799]
Did the information relate to CBLC shares in particular rather than
to financial products generally or listed issuers generally? [805] Did any of the safe harbour exceptions to disclosure apply? [806] Immediate release? [807]
Conclusion [808]
Involvement (twelfth cause of action) [809]
Did Mr Mulholland know of the relevant information? [810]
Did Mr Mulholland know that the information was not generally
available to the market? [811]
Did Mr Mulholland know that the information was information which a reasonable person would have expected, if it were generally available
to the market, to have had a material effect on CBLC’s share price? [812]
Did Mr Mulholland know the information related to CBLC shares in particular rather than to financial products generally or listed issuers
generally? [813]
Did Mr Mulholland know that the information was not information that was exempted from disclosure by the safe harbour exceptions in
the Listing Rules that he raised? [814]
Did Mr Mulholland know that the information was not immediately
released? [815]
Did Mr Mulholland intentionally participate by acts or omissions that
had a practical connection with the contravention? [816]
Section 503 defence [817]
Conclusion [818]
Non-disclosure of third CBI direction
CBLC contravention (twenty-first cause of action)
Was CBLC aware of the alleged information? [819]
Was the information not generally available to the market? [821]
Would a reasonable person expect the information, if it were generally available to the market, to have a material effect on the price of CBLC
shares? [822]
Did the information relate to CBLC shares in particular rather than
to financial products generally or listed issuers generally? [826] Did any of the safe harbour exceptions to disclosure apply? [827] Immediate release? [831]
Conclusion [832]
Involvement (twenty-second cause of action)
Did Mr Mulholland know of the relevant information? [833]
Did Mr Mulholland know that the information was not generally
available to the market? [834]
Did Mr Mulholland know that the information was information which a reasonable person would have expected, if it were generally available
to the market, to have had a material effect on CBLC’s share price? [835]
Did Mr Mulholland know the information related to CBLC shares in particular rather than to financial products generally or listed issuers
generally? [836]
Did Mr Mulholland know that the information was not informationt hat was exempted from disclosure by the safe harbour exceptions in
the Listing Rules that he raised? [837]
Did Mr Mulholland know that the information was not immediately
released? [843]
Did Mr Mulholland intentionally participate by acts or omissions that
had a practical connection with the contravention? [844]
Section 503 defence [847]
Conclusion [848]
Late disclosure of reserve strengthening
CBLC contravention (seventh cause of action)
Was CBLC aware of the alleged information? [849] Was the information not generally available to the market? [855] Would a reasonable person expect the information, if it were generally available to the market, to have a material effect on the price of CBLC
shares? [856]
Did the information relate to CBLC shares in particular rather than to
financial products generally or listed issuers generally? [857] Did any of the safe harbour exceptions to disclosure apply? [858] Immediate release? [861]
Conclusion [866]
Involvement (eighth cause of action)
Did Mr Mulholland know of the relevant information? [867]
Did Mr Mulholland know that the information was not generally
available to the market? [868]
Did Mr Mulholland know that the information was information which
a reasonable person would have expected, if it were generally available
to the market, to have had a material effect on CBLC’s share price? [869]
Did Mr Mulholland know the information related to CBLC shares in particular rather than to financial products generally or listed issuers
generally? [871]
Did Mr Mulholland know that the information was not information that was exempted from disclosure by the safe harbour exceptions in
the Listing Rules that he raised? [872]
Did Mr Mulholland know that the information was not immediately
released? [874]
Did Mr Mulholland intentionally participate by acts or omissions that
had a practical connection with the contravention? [875]
Section 503 defence [880]
Conclusion [801]
Alternative cumulative claim (twenty-third and twenty-fourth
causes of action) [882]
Result [883]
Costs [885]
Introduction
[1] The Financial Markets Authority (FMA) alleges that Mr Carden Mulholland was involved in five contraventions of the Financial Markets Conduct Act 2013 (FMCA) by CBL Corporation Ltd (CBLC) between August 2017 and February 2018.1 Mr Mulholland was the chief financial officer (CFO) of the CBL Group.
[2]The alleged contraventions are:
Fair dealing
(a)a misrepresentation to investors on 24 August 2017 that CBLC’s operating profit for the half-year to June 2017 had been materially reduced because its subsidiary, CBL Insurance Ltd (CBLI), had made a “one-off” increase of $16.5 million (m) to the amount that it was setting aside (i.e. reserving) for future claims against its insurance policies – in breach of the fair dealing provisions in ss 19, 22 and/or 23 of the FMCA;2
Continuous disclosure
(b)a failure to disclose to the market from 24 August 2017 that approximately $35m of premium receivables due to CBLI were over a year past due (aged receivables), and the solvency impact of the aged receivables under the Solvency Standard for Non-Life Insurance Business 2014 (Solvency Standard)3 – in breach of the continuous disclosure obligations in s 270 of the FMCA and cl 10.1 of the NZX Ltd Main Board/Debt Market Listing Rules (Listing Rules);4
1 A separate proceeding (CIV-2019-404-2739) alleging involvement in other contraventions was to be heard together with this proceeding but was adjourned until 2026 on 5 June 2024: Financial Markets Authority v CBL Corporation Ltd (in liq) [2024] NZHC 1473.
2 Third amended statement of claim, second cause of action.
3 Solvency Standard for Non-life Insurance Business 2014 (Reserve Bank of New Zealand, December 2014) [Solvency Standard]; issued by the Reserve Bank of New Zealand under s 55 of the Insurance (Prudential Supervision) Act 2010, which was applicable to CBLI from 31 December 2015.
4 Tenth cause of action. The NZX Ltd Main Board/Debt Market Listing Rules were the relevant listing rules at all relevant times; specifically, the versions issued on 22 May 2017 and 1 October 2017.
(c)a failure to disclose to the market on or shortly after 11 October 2017 that CBLI signed a term sheet to sell the aged receivables to Castlerock Receivables Management Ltd5 (Castlerock and Castlerock transaction) and its effect – in breach of the continuous disclosure obligations in s 270 of the FMCA and cl 10.1 of the Listing Rules;6
(d)a failure to disclose to the market on or shortly after 13 January 2018 that the Central Bank of Ireland (CBI) had directed CBLC’s subsidiary, CBL Insurance Europe dac (CBLIE), to apply a capital add-on, essentially requiring it to hold additional cash reserves of €31.5m – in breach of the continuous disclosure obligations in s 270 of the FMCA and cl 10.1 of the Listing Rules;7 and
(e)a failure to disclose to the market from 25 January 2018 until 5 February 2018 that CBLI’s reserves needed strengthening by approximately $100m – in breach of the continuous disclosure obligations in s 270 of the FMCA and c 10.1 of the Listing Rules.8
[3] In the alternative to the four continuous disclosure contraventions, the FMA alleges a failure to disclose to the market (at least by the end of January 2018) the cumulative material effect of the information concerning receivables, directions and conditions issued by CBI, and reserving – in breach of the continuous disclosure obligations in s 270 of the FMCA and cl 10.1 of the Listing Rules.9
The way the case unfolded
[4] These alleged contraventions represent a considerably streamlined version of the FMA’s case. The case was prepared for trial on the basis of the second amended statement of claim dated 30 June 2023, which contained 24 causes of action against eight defendants. However, by March 2024, the FMA had discontinued against Mr Alistair Hutchison’s estate and settled with six other defendants. This left
5 Subsequently renamed MRO2 Ltd.
6 Twelfth cause of action.
7 Twenty-second cause of action.
8 Eighth cause of action.
9 Twenty-fourth cause of action.
Mr Mulholland as the only defendant at trial. Four interrelated consequences are noteworthy.
[5] First, on 19 June 2024 the FMA applied for leave to file a third amended statement of claim to streamline its case against Mr Mulholland. Mr Dixon KC, for the FMA, advised that the FMA would not pursue a number of causes of action, but that a good deal of evidence relating to those causes of action would still be adduced at trial.
[6] Second, also on 19 June 2024, Mr Mulholland applied to strike out certain causes of action on the ground of abuse of process. There was some overlap between these applications. Mr Jones KC, for Mr Mulholland, indicated that Mr Mulholland would not oppose the third amended statement of claim without prejudice to his strike out application. Leave to amend was deferred pending consideration of the position of Mr Peter Harris (CBLC’s managing director). The FMA had settled with Mr Harris, but had not discontinued pending a separate decision in relation to his admitted involvement and penalty. Leave to file the third amended statement of claim was granted on 17 July 2024 without prejudice to the strike out application.10 The strike out application was heard on 18 July 2024 and dismissed on 24 July 2024.11
[7] Third, CBLC and all its directors except Mr Hutchison (who died in December 2021) have admitted some of the FMA’s causes of action, and the proceeding against them has been determined on the basis of those admissions and discontinuance of the remaining causes of action. For reasons that I will address later,12 the FMA has proceeded against Mr Mulholland on the basis that the admissions of other defendants, including CBLC as the company contravener, are inadmissible against Mr Mulholland.
[8] Fourth, the trial proceeded without oral evidence from any of the directors of CBLC/CBLI. Insofar as the directors’ internal (intra-company) acts and omissions are
10 Financial Markets Authority v CBL Corporation Ltd (in liq) HC Auckland CIV-2019-404-2745, 17 July 2024 (Minute).
11 Financial Markets Authority v CBL Corporation Ltd (in liq) [2024] NZHC 2026 (results judgment); and Financial Markets Authority v CBL Corporation Ltd (in liq) [2024] NZHC 2235 (reasons judgment).
12 At [30]-[31].
relevant, the FMA relied on the extensive documentary record from CBLC/CBLI, and evidence from two members of Mr Mulholland’s finance team (Mr Henry Ray and Mr Joel Clements), along with others who interacted with the CBL Group (including witnesses from the Reserve Bank of New Zealand (RBNZ), CBI, PwC, Deloitte, Castlerock and CBLC’s institutional investors).
[9] Mr Mulholland denies that there were any contraventions by CBLC and, if there were, that he was involved in them. A focus of his defence is the delineation between corporate governance and management. He says that CBLC’s disclosure decisions were made by the board of directors in possession of all relevant information and that, as a non-director in company management, he was not responsible for disclosure, and his acts or omissions did not cause any contravention. He says that he provided material information to the board of CBLC/CBLI (referred to as the Board)13 to make decisions on disclosure, and he had no further duty or responsibility.
[10] The trial was completed within six weeks although there was a substantial amount of oral and documentary evidence.14 As well as the FMA’s witnesses of fact, the FMA called evidence from four independent experts – an actuary (Mr Brown), an auditor (Mr Borrie), a company director (Mr Pilkington) and an investment banker (Mr Pigou). Mr Mulholland was the one defence witness. It is neither feasible nor necessary to set out in full or exhaustively review all the evidence or counsels’ extensive submissions. I have carefully considered the relevant evidence and counsels’ submissions as they relate to that evidence and the issues. My analysis will focus on the ingredients of each contravention, the principal evidence that bears on them, my conclusions in relation to them and the reasons for those conclusions.
[11] The structure of this judgment is that, following some factual background, I address the applicable legal principles and then set out in some detail the facts that are largely uncontested and that provide the basis for my later analysis and conclusions in respect of the issues in dispute. Given the nature of the case, the way it unfolded,
13 These companies shared the same board of directors, and met together, from June 2015.
14 Before trial, I varied the default rule in r 9.5(4) of the High Court Rules 2016 so that documents that were merely footnoted in openings or briefs of evidence, but not substantively referred to, were not automatically received into evidence: Financial Markets Authority v CBL Corporation Ltd (in liq) HC Auckland CIV-2019-404-2745, 21 June 2024 (Minute).
the approach to accessory liability (addressed from [63] below) and the extent of the documentary evidence, this factual section is necessarily long. However, it avoids the need to include such detailed reference to the facts out of sequence in the later analysis of the issues in each cause of action.
Factual background
[12] In 1973, CBLI was founded (initially named Contractors Bonding & Discount Corporation Ltd). In 1979, it changed its name to Contractors Bonding Ltd.
[13] In 1996, CBLI was purchased by interests connected with Mr Harris and Mr Hutchison.
[14] Although based in Auckland, in 2000 CBLI initiated expansion offshore with the objective of transforming the Group into an international player in the insurance industry, whilst retaining its core competencies in credit risk – particularly in the building sector. CBLI expanded into the financial risk insurance business. Its focus was on non-traditional insurance lines, with a particular emphasis on offshore construction and property industries – most relevantly, construction insurance in France (French Construction Insurance) from about 2005 when CBL began working with Securities and Financial Solutions Europe (SFS). I will address this type of insurance in more detail below. The large majority of CBLI’s business was as a reinsurer.15
[15] In 2007, Mr Mulholland was employed by CBLI as its CFO. At that time, CBLI was part of a small group of companies that were effectively owned by Mr Harris and Mr Hutchison. The group comprised an insurance and bonding company (CBLI) and two small warranty companies. Mr Mulholland’s role at this early stage was more of a company accountant role. He reported to Mr Harris, CBLI’s chief executive officer (CEO), who also became managing director. Mr Mulholland was never a director of CBLI.
15 Reinsurance is an agreement to indemnify an insurer in respect of a proportion of underlying risk in exchange for a share of the premium received by the insurer. The entity accepting the risk is the reinsurer, and is said to accept inwards reinsurance. The entity ceding the risk is the cedant, or ceding company, and is said to place outward reinsurance.
[16] In September 2010, parts of the Insurance (Prudential Supervision) Act 2010 (IPSA) came into force. IPSA introduced significant changes to the way in which New Zealand insurers were to be regulated (addressed further below). Under IPSA, RBNZ is the designated prudential supervisor of insurers in New Zealand.16 This included CBLI, even though the vast majority of its insurance business derived from overseas markets. RBNZ’s supervision of CBLI fell under the Insurance Oversight team within the Prudential Supervision Department. RBNZ’s role does not include undertaking an assessment of the obligations of a listed insurer to make market disclosures.
[17] Mr Mulholland suggested to Mr Harris that the time was right to appoint a senior financial controller who would have overall control and responsibility for all statutory reporting, and for ensuring the regulatory reporting requirements were able to be met. In July 2011, Mr Ray was employed as CBLI’s financial controller.
[18] In 2011, the CBL Group acquired European Insurance Services Ltd (EISL). EISL had been incorporated in 2006 and was based in the United Kingdom, but operated solely in France. EISL was licensed as a managing general agent (MGA) by the Financial Conduct Authority in the United Kingdom, and had insurance underwriting authority. I explain the role of an MGA at [137] below. The core products EISL provided were in French Construction Insurance, and these were distributed through a network of around 800 independent insurance brokers. EISL was one of the largest independent MGAs in France. The revenue recognised for EISL consisted of commissions, policy fees, and profit commissions associated with the placement of insurance contracts. Mr Mulholland was a director of EISL.
[19] As IPSA came into force, existing insurers in New Zealand had 18 months to obtain a provisional insurance licence and three years to obtain a full licence. The requirements to obtain a provisional licence were minimal. RBNZ was obliged to issue provisional licences to businesses classified as insurers, subject to some conditions.
16 Insurance (Prudential Supervision) Act, s 12(b).
[20] On 14 February 2012, CBLI was issued a provisional insurance licence, allowing it to carry on insurance business in New Zealand under the supervision of RBNZ. From the outset, RBNZ saw CBLI as an outlier, largely because its business model was different from other insurers and almost all of its business was overseas. On being provisionally licensed, CBLI became subject to licence conditions that activated various requirements at various dates through to 2013.17 The onus was on CBLI to apply for a full licence.
[21] On 18 June 2012, CBLC was incorporated. CBLC was initially a shell company. Mr Mulholland was a placeholder director until CBLC’s board was appointed and shares in other companies in the CBL Group were transferred to it. This occurred in November 2013, and CBLC became the parent company of the CBL Group. From then onwards, Mr Mulholland was not a director of CBLC. Mr Mulholland remained CFO of CBLI, but also became CFO for the CBL Group, and was employed by CBLC.18
[22] By May 2013, RBNZ’s Insurance Oversight team had expressed some concerns about CBLI’s business, particularly around governance and risk management. At that point, they also raised issues regarding the solvency of CBLI. They felt that CBLI raised a number of red flags. These included its fast rate of expansion, its unique business model, and a number of indications that internal controls may have been below the standard expected of a regulated insurer.19
[23] Because of its concerns, RBNZ decided to commission KPMG to conduct an independent review of CBLI’s ability to carry on business in a prudent manner. KPMG’s findings were delivered in a report on 16 August 2013 (KPMG Report). The KPMG Report considered that CBLI had the management ability and intent to carry on its business in a prudent manner in accordance with s 20 of IPSA, but said there
17 Insurers with provisional licences had a licence condition specifying a commencement date for solvency requirements (addressed further below). CBLI had solvency requirements from 31 December 2012.
18 Mr Mulholland remained CBL Group CFO until his employment was terminated by the interim liquidators on 26 February 2018. In October 2017, he had given six months’ notice of his resignation for family reasons.
19 For example, numerous errors were found in CBLI’s Adjusted Audit Variance Report for the year-end 31 December 2012.
was a need for the development of the company’s policies and practices to continue with a particular focus on strengthening claims reserving and risk management.
[24] On 4 September 2013, RBNZ issued CBLI a full insurance licence to carry on insurance business in New Zealand under RBNZ supervision, pursuant to s 19 of IPSA. RBNZ’s letter to Mr Harris required CBLI, as part of the ongoing requirements of the licence, to address the concerns raised by the KPMG Report. The areas that needed to be addressed to RBNZ’s satisfaction included:
(a)the alleged insufficient formal processes and documentation with regard to risk management; and
(b)the KPMG comments about claims reserving and management.
[25] In November 2013, the CBL Group through its subsidiary LBC Holdings Europe Ltd acquired CBLIE (then called Achmea Insurance Ireland Ltd).20 CBLIE was a licensed European insurer headquartered in Dublin, Ireland, and was regulated by CBI. This acquisition provided the CBL Group with a licensed European insurer able to write business throughout the European Union.21 Following the acquisition, CBLIE focused on specialist, non-traditional profitable business lines throughout Europe. Its principal business activity was writing property, suretyship, legal expenses, and miscellaneous financial loss insurance throughout Europe. Mr Mulholland was a director of CBLIE.
[26] In 2015, CBLC carried out an initial public offering (IPO) and dual-listed on the New Zealand Stock Exchange (NZX) and Australian Stock Exchange (ASX).
[27] As explained in more detail below, in 2017 CBLI and its European ceding (fronting) insurers came under increasing regulatory scrutiny. This partly arose from concerns about the adequacy of CBLI’s reserving. CBLI’s Appointed Actuary22 at PwC was also providing updates in relation to reserving. Issues with CBLI’s solvency
20 CBLIE was incorporated as Interpolis Insurance Ireland Ltd on 3 June 1994. It changed its name to Eureko Insurance Ireland Ltd in 2006, and to Achmea Insurance Ireland Ltd in 2011.
21 Following the acquisition, all the risks that had been written by CBLIE were novated back to the vendors, and the existing business went into run-off.
22 See below from [177].
calculations also arose. Ultimately, in February 2018, after CBLC’s shares had been placed in a trading halt and the need for further reserving and write-off of the aged receivables was disclosed to the market, CBLC’s shares were suspended, and interim liquidators of CBLI were appointed by the Court on the application of RBNZ.23
FMCA – applicable legal principles
Contraventions
[28]Section 486 of the FMCA provides:
486 When court may make declarations of contravention
(1) The court may, on the application of the FMA or any other person, make a declaration of contravention if it is satisfied that a person has—
(a)contravened a civil liability provision; or
(b)been involved in a contravention of a civil liability provision.
(2)The court may also make a declaration of contravention under section 489(2)(b).
[29] Each of the fair dealing and continuous disclosure provisions of the FMCA relied on by the FMA in this case (ss 19, 22, 23 and 270) is a “civil liability provision”, as defined in s 485.24
[30] It is common ground that for a person to be involved in a contravention of the FMCA, there must be a contravention. Here, that means that for Mr Mulholland to be liable, there must be a (primary) contravention by CBLC. As indicated, it is also common ground that earlier admissions by CBLC in this proceeding are inadmissible against Mr Mulholland and that the FMA has to establish the primary contraventions. I note s 487 of the FMCA, which provides:
487 Purpose and effect of declarations of contravention
(1)The purpose of a declaration of contravention is to enable an applicant for a compensatory order or other civil liability order under section 497 to rely on the declaration of contravention in the proceedings for that order, and not be required to prove the contravention or involvement in the contravention.
23 Reserve Bank of New Zealand v CBL Insurance Ltd [2018] NZHC 264.
24 Financial Markets Conduct Act 2013, ss 38(1), 385(1) and (3)(c), and 485(a) and (d).
(2)Accordingly, a declaration of contravention is conclusive evidence of the matters that must be stated in it under section 488.
[31] Consistent with the approach to s 1317F of Australia’s Corporations Act 2001 (Cth) considered in Australian Securities and Investments Commission (ASIC) v Rich,25 I accept that the intention of s 487 appears to be to make the matters declared in accordance with s 488 binding in separate proceedings brought by an applicant other than the FMA for a compensatory order or other civil liability order against the defendant who is the subject of the declaration. It does not assist the FMA against other defendants in this proceeding. Otherwise, as Mr Dixon submitted, it would unduly hamper the ability of the regulator and a defendant to settle matters between them as it would empower other defendants to intervene to stop declarations being made against their interests. That is contrary to the public interest in ensuring prompt resolution of proceedings.
Fair dealing
[32] Part 2 of the FMCA concerns fair dealing. It includes provisions prohibiting misleading or deceptive conduct, the making of false or misleading representations, and the making of unsubstantiated representations.
[33]Section 19 provides:
Misleading or deceptive conduct generally
(1)A person must not, in trade, engage in conduct that is misleading or deceptive or likely to mislead or deceive in relation to—
(a)any dealing in financial products; or
(b)the supply or possible supply of a financial service or the promotion by any means of the supply or use of financial services.
(2)A person must not engage in conduct that is misleading or deceptive or likely to mislead or deceive in relation to any dealing in quoted financial products.
(3)Subsection (2) applies regardless of whether or not the dealing is in trade.
25 Australian Securities and Investments Commission (ASIC) v Rich [2004] NSWSC 836, (2004) 50
ACSR 500 at [67]-[68].
[34]Section 22 relevantly provides:
22False or misleading representations
A person must not, in trade, in connection with any dealing in financial products, the supply or possible supply of financial services, or the promotion by any means of the supply or use of financial services, make a false or misleading representation—
(a)that the products or services are of a particular kind, standard, quality, grade, quantity, composition, or value, or have had a particular history; or
…
(d)that the products or services have any sponsorship, approval, endorsement, performance characteristics, accessories, uses, or benefits; or
…
[35] It is common ground that a representation is a statement of present or past fact and a false or misleading representation is an untrue statement of present or past fact. However, it is also accepted that a statement as to future events or as to the opinion of the maker may be taken to imply that there is a reasonable basis for the statement, so as to amount to a representation about a present fact.26
[36] It is also common ground that the issue is how typical investors would have interpreted the statement. It is important to assess statements in their context – that is, in all the circumstances.27
[37]Section 23 provides:
23Unsubstantiated representations
(1)A person must not, in trade, make an unsubstantiated representation.
(2)A representation is unsubstantiated if the person making the representation does not, when the representation is made, have reasonable grounds for the representation, irrespective of whether the representation is false or misleading.
26 Weine v Tadd Management Ltd [2024] NZCA 323, (2024) 16 TCLR 855 at [29], in the context of misrepresentation under s 35 of the Contract and Commercial Law Act 2017.
27 Ridgway Empire Ltd v Grant [2019] NZCA 134, (2019) 20 NZCPR 236 at [11] (Supreme Court refused leave to appeal: Ridgway Empire Ltd v Grant [2019] NZSC 85); and Weine v Tadd Management Ltd, above n 26, at [30].
(3)This section does not apply to a representation that a reasonable person would not expect to be substantiated.
(4)In this section and sections 24 to 27, representation means a representation that is made—
(a)in respect of financial products or financial services; and
(b)in connection with—
(i)any dealing in financial products; or
(ii)the supply or possible supply of financial services or the promotion by any means of the supply or use of financial services.
[38] Sections 19-23 apply not only to conduct in New Zealand, but also to conduct outside New Zealand by any person resident, incorporated, registered, or carrying on business in New Zealand to the extent that that conduct relates to dealing in financial products, or the supply of a financial service, that occurs (in part or otherwise) within New Zealand.28
[39] In this case, it is admitted that CBLC was “in trade” and that the relevant conduct was in relation to/in connection with a “dealing in financial products”.
[40] It is common ground that liability for a primary contravention of any of the relevant fair dealing provisions is strict liability.29 There is no requirement for the misleading representation or conduct to be intentionally false.
[41] In the context of this case, ss 19 and 22 overlap in applying to misleading statements and it is unnecessary to consider the alternative references to “deceptive” conduct and “false” representations.
[42] Therefore, to prove the relevant fair dealing contravention by CBLC, the FMA must prove:
(a)sections 19 and 22 – that CBLC’s representation to investors describing the reserve increase as “one-off” was misleading;
28 Financial Markets Conduct Act, s 33(1)(b).
29 Although the pecuniary penalty provision, s 489 of the Financial Markets Conduct Act, is discretionary.
(b)section 22(a) – that CBLC’s representation was that products or services were of a particular kind, standard, quality, grade, quantity, composition, or value, or have had a particular history;
(c)section 22(d) – that CBLC’s representation was that products or services have any sponsorship, approval, endorsement, performance characteristics, accessories, uses, or benefits;
(d)section 23 – that CBLC did not have reasonable grounds for the representation, and a reasonable person would expect the representation to be substantiated.
[43] Given the overlap between ss 19 and 22, it is also unnecessary to address the further requirements of s 22(a) and (d) as to the nature of the representation, but I accept that a representation about an issuer’s financial results or performance amounts to a representation about its value and the value of its shares.
Continuous disclosure
[44] Part 5 of the FMCA relates to dealing in financial products on markets. Subpart 4 of pt 5 specifically deals with continuous disclosure. It provides:
Subpart 4—Continuous disclosure
270Listed issuers must disclose in accordance with listing rules if continuous disclosure listing rules apply
(1)A listed issuer must notify information in accordance with the continuous disclosure provisions of the listing rules for the licensed market if—
(a)the listed issuer is a party to a listing agreement with the licensed market operator; and
(b)the listed issuer has information that those continuous disclosure provisions require it to notify; and
(c)the information is material information that is not generally available to the market.
(2)Subsection (1) does not affect or limit the situations in which action can be taken (other than under this Act) for a failure to comply with provisions of the listing rules for a licensed market.
271What are continuous disclosure provisions
In this Act, continuous disclosure provisions means provisions that require a listed issuer that is a party to a listing agreement with a licensed market operator to notify information about events or matters as they arise for the purpose of that information being made available to participants in the licensed market.
272No contravention of continuous disclosure provisions by person who takes reasonable steps to ensure listed issuer complies
A person (A) does not, in relation to the contravention by a listed issuer of a continuous disclosure obligation or a term or condition of a continuous disclosure exemption, contravene, or become involved in the contravention of, that obligation or term or condition if—
(a)A took all steps (if any) that were reasonable in the circumstances to ensure that the listed issuer complied with the obligation or term or condition; and
(b)after doing so, A believed on reasonable grounds that the listed issuer was complying with the obligation or term or condition.
[45]“Material information” is relevantly defined in s 231(1):
231 Meaning of material information
(1)In this Part, material information, in relation to a listed issuer, is information that—
(a)a reasonable person would expect, if it were generally available to the market, to have a material effect on the price of quoted financial products of the listed issuer; and
(b)relates to particular financial products, a particular listed issuer, or particular listed issuers, rather than to financial products generally or listed issuers generally.
[46] At all relevant times, CBLC was listed on NZX (the licensed market operator), was party to a listing agreement with NZX, and the Listing Rules applied. As Venning J said in Financial Markets Authority v Jackson, while the Listing Rules create a contractual obligation on an issuer, s 270 of the FMCA confirms the obligation to comply with the continuous disclosure provisions is also a statutory obligation.30 The continuous disclosure obligations are intended to provide the market with material information relating to the issuer to preserve the integrity of the market.31
30 Financial Markets Authority v Jackson [2018] NZHC 2052, (2018) 12 NZCLC 98-066 at [15].
31 At [34].
[47]At all relevant times, r 10.1.1(a) of the Listing Rules stated that:
10.1.1 Without limiting any other Rule, every Issuer shall:
(a)once it becomes aware of any Material Information concerning it, immediately release that Material Information to NZX, provided that this Rule shall not apply when:
(i)a reasonable person would not expect the information to be disclosed; and
(ii)the information is confidential and its confidentiality is maintained; and
(iii)one or more of the following applies:
(A)the release of information would be a breach of law; or
(B)the information concerns an incomplete proposal or negotiation; or
(C)the information comprises matters of supposition or is insufficiently definite to warrant disclosure; or
(D)the information is generated for the internal management purposes of the Issuer; or
(E)the information is a trade secret.
In this Rule 10.1.1, an Issuer is aware of information if a Director or an executive officer of the Issuer … has come into possession of the information in the course of the performance of his or her duties as a Director or executive officer.
[48] The proviso in r 10.1.1(a) gives rise to exceptions to the obligation to immediately release, known as “safe harbour” provisions.32 I note the obligation to release information applies unless the requirements of paragraphs (i), (ii) and (iii) are met even though paragraph (iii) requires only one of (A)-(E) to apply. Thus, confidentiality (paragraph (ii)) is a prerequisite, but is insufficient alone to exempt release. Paragraph (i) and one of the limbs of paragraph (iii) must also apply.
[49] “Material information” was defined in the Listing Rules in essentially the same way as in the FMCA.33 It is an objective test. It is also an expectation-based test, considered without the benefit of hindsight.
32 See Guidance Note – Continuous Disclosure (NZX, April 2017), s 7 (Guidance Note).
33 Rule 1.6.1.
[50] Footnotes to the Listing Rules are intended as a guide for users and an aid in interpretation and, only to that extent, form part of the Listing Rules.34 The following footnotes to r 10.1.1 are relevant:
(a)Footnote 1 provided a list of information that was likely to be material information under this rule, including:
•a change in the Issuer’s financial forecast or expectation.
•any proposed change in the general nature of the business of an Issuer or its group.
(b)Footnote 3 provided:
For the purpose of Rule 10.1.1(a)(i), a “reasonable person” would not expect the information to be disclosed if the release of the information would:
(a)unreasonably prejudice the Issuer; or
(b)provide no benefit to a person who commonly invests in securities.
(c)Footnote 10 provided that an issuer “should also be guided by the principle that if in doubt it should disclose the information.”
[51] There is also an NZX Guidance Note on Continuous Disclosure (Guidance Note). The relevant version of this Guidance Note was dated April 2017. Its header stated that its purpose was to “provide guidance to NZX Issuers which are subject to continuous disclosure obligations”. Section 3 of the Guidance Note addressed material information, referring to the definition/test in s 3.1. Section 3.1 included that:
When considering whether information is material, issuers should be guided by the principle that if in doubt, they should disclose the information (see footnote 10 to rule 10.1). As noted above, the obligation to disclose material information immediately is a fundamental obligation and NZX may take disciplinary action against issuers for non-compliance. Therefore, NZXR [NZX Regulation] encourages issuers to take a cautious approach when determining whether information is “material information”.
34 Rule 1.6.5.
[52]The Guidance Note also included the following in s 3.2:
“Reasonable person” is not defined in the rules, but in NZXR’s view, a “reasonable person” is a person who commonly invests in securities, and holds such securities for a period of time, based on their view of the inherent value of the securities.
[53] Section 3.3 of the Guidance Note addressed material effect. Explicitly without altering the nature of the expectation-based test, the Guidance Note included:
In monitoring issuers’ compliance with continuous disclosure, NZXR will consider price movements in securities when determining whether information has had a material effect on the price of an issuer’s quoted securities:
•A price movement of 10% or more in a quoted security will generally be treated by NZXR as evidence that information has had a material effect on the price of those quoted securities.
•A price movement of 5% or less in a quoted security will generally be treated by NZXR as evidence that information has not had a material effect on the price of those quoted securities.
Whether price movements between 5% and 10% are evidence of a material effect will depend on the specific facts and circumstances. A price movement of 5% may not be considered a “material effect” in respect of an illiquid security, but for issuers with large market capitalisations and highly liquid securities, price movements of this magnitude may be considered evidence of a “material effect”.
[54]Section 3.6 addressed incomplete information and upcoming events:
3.6Dealing with incomplete information and upcoming events
In some situations an issuer may receive information about an event over time. The issuer may not be able to make a determination regarding the materiality of the information based on the initial or piecemeal information alone. In such cases, no immediate disclosure obligation will be triggered. However, if an issuer requires further information in order to determine whether or not initial information is material information, the additional information must be sought as soon as possible. An issuer will have a disclosure obligation upon further information being received by the issuer allowing a determination that the information is material to be made.
If an issuer is able to determine that it holds material information based upon initial or incomplete information alone, that information must be immediately disclosed to the market, regardless of the fact that there may be additional information to follow. The issuer cannot simply wait until they have received all information concerning a material event before a disclosure obligation will arise.
There may also be situations where an issuer becomes aware that a material event is going to occur but the event has not yet actually occurred. An issuer will be required to immediately disclose the event upon becoming aware that the event will occur instead of waiting until the event has occurred. For example, if an issuer becomes aware that it will breach a financial covenant, and the fact of such prospective breach is information that a reasonable person would expect to have a material effect on the price of that issuer’s quoted securities (i.e. the fact of the prospective breach is material information) the issuer must disclose this information immediately, regardless of the fact that the breach has not actually yet occurred. The types of factors that issuers may need to consider in determining whether a particular breach or pending breach is material include:
•The nature of the covenant;
•The particular loan or facility involved;
•The impact of the breach or pending breach;
•Discussions with the lender; and
•The issuer’s current financial position.
Lastly, some information will only become material once it is signed off by the issuer’s board. For example, if the chief financial officer of an issuer puts forward a proposal to write down the carrying value of an asset, that proposal may only be considered complete if and when it is approved by the issuer’s board. No disclosure obligation would arise until board sign-off has occurred.
[55]As NZXR said in its investigation report into Fletcher Building Ltd:35
The Guidance Note states that a material risk that actual results will materially differ from an announced projection, forecast or expectation is likely to be Material Information. That material risk of a deviation will usually arise before the actual change in the forecast is confirmed. It is the material risk of a future material deviation that is the Material Information, in these circumstances.
[56] Sections 4 and 5 of the Guidance Note dealt with timing in relation to becoming aware of information and disclosure respectively. Section 4 stated:
4.When does an issuer become aware of information?
4.1When directors and executive officers become aware of information
Rule 10.1.1 states that an issuer becomes “aware of information” if a director or an executive officer of the issuer (and in the case of a managed fund, a director or executive officer of the manager) has come into possession of the information in the course of the performance of his or her duties as a director
35 Investigation Report, Fletcher Building Limited - Continuous Disclosure (NZX Regulation, January 2018) at 7.
or executive officer. A rule of thumb has been to define “executive officer” as a person who reports directly to a board of directors or a person who reports directly to a person who reports directly to a board of directors.
A director or executive officer of an issuer who becomes aware of information, must consider, immediately, whether that information is “material information” (by considering the material information test discussed in subsection 3.1 above) and must therefore be disclosed. Issuers must implement appropriate systems and procedures to ensure that material information is promptly identified and decisions as to whether disclosure is required are made (refer to ‘Compliance procedures’ in section 6 below for further information).
[57] I accept in this respect that the Guidance Note does not itself impose a legal duty on executives of an issuer to consider whether information of which they are aware is material. Whether executives have such a duty under their employment arrangements and the issuer’s compliance procedures is a separate question.
[58]Section 5 dealt with the requirement to disclose “immediately”:
5.1What does “immediately” mean?
Once an issuer becomes aware of material information, it must be immediately released to the market. In NZXR’s view, “immediately” means “promptly and without delay”.
There will inevitably be a period of time between a director or executive officer of an issuer becoming aware of material information and the release of that information to the market. This does not mean, by default, that an issuer has failed to release information immediately. How promptly an issuer is able to release an announcement will depend on the particular circumstances and the particular nature of the material information. NZXR will consider these factors when determining whether an issuer has complied with the requirement to release material information immediately (or ‘promptly and without delay’). For example, it may depend on:
•The nature, amount and complexity of the information concerned;
•Where the information originated from and whether the information needs to be checked or verified; and
•How long it takes the issuer to draft the necessary announcement, including to ensure the announcement is complete, accurate and not misleading.
Issuers need to have appropriate systems and procedures in place to meet their continuous disclosure obligations. This point is discussed further below under the ‘Compliance Procedures’ section of this guidance note. Note also the interaction with the use of trading halts in this area, as discussed in section 5.3.
Board oversight
Issuers must disclose material information as soon as they become aware of it, regardless of when the next board meeting is scheduled. For example, where an issuer becomes aware that it has breached a material financial covenant, the issuer must disclose this information as soon as it becomes aware of it, and may not wait until the next scheduled board meeting to address the issue.
Where a decision or recommendation is incomplete until it is signed off or approved by an issuer’s board, the issuer should prepare an announcement in advance, so that it can be released immediately after board sign-off. NZXR considers that an issuer will generally meet the requirement to release information immediately (or ‘promptly and without delay’) by releasing it immediately after the conclusion of the relevant board meeting.
Board oversight of continuous disclosure is important, but issuers need to balance the requirement to disclose material information “immediately” with the practical issues relating to the operation of a board. That means that arrangements need to be in place to ensure timely disclosure, and it may not be possible for the board as a whole to be involved in decision making in relation to disclosure where the issuer has unexpectedly become aware of material information. Please refer to the section 6 below titled, ‘Compliance Procedures’ for further commentary in relation to board oversight of continuous disclosure.
[59] Section 6 of the Guidance Note addressed compliance procedures and provided that they should deal with the following matters:
· Enabling identification of price sensitive information in different areas of the business;
· Considering information generated by the issuer as a matter of routine, such as monthly trading metrics, to determine whether a market update is required;
· Responding to sudden or unexpected events in a timely manner;
· Enabling issues and incidents to be appropriately escalated so that disclosure obligations are considered by responsible individuals;
· Identifying individuals who have authority to agree and sign off urgent market announcements;
· Identifying individuals who have responsibility for discussing disclosure issues with NZX i.e. individuals with sufficient knowledge of the business and sufficient authority to agree the release of an announcement or to request a trading halt where necessary;
· Preparation of draft announcements in advance of board meetings or other planned events, such as entering into agreements;
· Enabling appropriate board oversight of issuers’ compliance with continuous disclosure[; and]
· Where possible, releasing material information prior to market open.36
[60] In relation to trading halts, the Guidance Note stated that an issuer may need to request a trading halt to meet its continuous disclosure obligations in certain circumstances, but also that trading halts should not be requested as a tactic to delay release of information.37 A trading halt can usually only be imposed for up to two business days,38 which indicates that this period is at the outside margin of immediate disclosure.
[61] Therefore, to prove each of the relevant continuous disclosure contraventions of s 270 by CBLC, the FMA must prove that:
(a)CBLC was aware of the alleged information;
(b)the information was not generally available to the market;
(c)a reasonable person would expect the information, if it were generally available to the market, to have a material effect on the price of CBLC shares;
(d)the information relates to CBLC shares in particular rather than to financial products generally or listed issuers generally; and.
(e)CBLC did not immediately release the information to NZX.
[62] I deal separately with the onus of proof in relation to the safe harbour exceptions below.
36 However, NZXR notes that an issuer’s ability to release prior to market open will partly depend on where the material information originates from (i.e. whether information originates from the issuer itself or in response to information from a third party) and does not negate the requirement to disclose all material information immediately.
37 Section 5.3.
38 Guidance Note – Trading Halts and Suspensions (NZX, May 2017), s 2.3.
Involvement in contraventions – accessory liability
[63] Section 533 of the FMCA deals with involvement in contraventions; that is, accessory liability. It provides:
533 Involvement in contraventions
(1)In this Act, a person is involved in a contravention if the person—
(a)has aided, abetted, counselled, or procured the contravention; or
(b)has induced, whether by threats or promises or otherwise, the contravention; or
(c)has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or
(d)has conspired with others to effect the contravention.
(2)Subsection (1) does not apply to proceedings for offences (but see Part 4 of the Crimes Act 1961, which relates to parties to the commission of offences).
[64] Here, the FMA relies on s 533(1)(c), that Mr Mulholland “has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention”.
[65] It can immediately be seen that, unlike listed issuer liability for the primary contravention, accessory liability has a knowledge component explicit in s 533(1)(c). Counsel were not aware of any case that has specifically addressed the meaning of this phrase. Nor were counsel aware of any case that has determined the approach for accessory liability under the fair dealing or continuous disclosure provisions of the FMCA.39
[66] In a recent s 265 market manipulation case, Financial Markets Authority v Zhong, Robinson J said:40
Section 533 is in essentially the same terms as s 83 of the Commerce Act 1986 and s 43 of the Fair Trading Act 1986. Authorities in relation to these statutory
39 The approach was not in issue in the earlier judgments in this proceeding although I touched on it in the judgment concerning Mr Harris delivered after the end of this hearing: Financial Markets Authority v CBL Corporation Ltd (in liq) [2024] NZHC 2322 at [108]-[110]. I also touched on it in the strike out judgment in the IPO proceeding: Financial Markets Authority v CBL Corporation Ltd (in liq) [2024] NZHC 3597 at [28].
40 Financial Markets Authority v Zhong [2023] NZHC 766, [2023] NZCCLR 28 at [42].
provisions confirm that they are to be applied in the same way as those governing accessory liability in the criminal law. [An] accessory will only be liable if he or she intentionally participates in a contravention.41
[67] Neither counsel suggested that accessory liability requires deliberate breach of the FMCA. It was largely common ground that being “knowingly concerned in” a contravention requires what has been described as the “orthodox” approach to accessory liability,42 by analogy with the approach applying in criminal law; that is:
(a)actual knowledge (including wilful blindness) of the essential facts giving rise to the contravention; and
(b)intentional participation in the contravention.
[68] I say “largely common ground” as to these requirements because Mr Dixon accepted in this Court that the FMA must establish actual knowledge in light of Court of Appeal authority,43 but stated that it may seek to argue otherwise in a higher court.
[69] It is evident from the authorities that there is some overlap between these limbs of actual knowledge and intentional participation. Arnold J said in New Zealand Bus Ltd v Commerce Commission (NZ Bus)44 that an accessory will be liable only if he or she intentionally participates in the contravention, which he said means simply that the person must have knowledge of the essential matters which go to make up the contravention. Mr Jones emphasised that, for example, a person who participates by assisting another to take property unlawfully while believing the other person has rights to the property would not intentionally participate. However, it may equally be said that such a person lacks knowledge of an essential fact giving rise to the
41 See New Zealand Bus Ltd v Commerce Commission [2007] NZCA 502, [2008] 3 NZLR 433 [NZ Bus] at [260]; and Specialised Livestock Imports Ltd v Borrie CA72/01, 20 September 2002 [Specialised Livestock] at [155]-[157].
42 NZ Bus, above n 41, at [137]-[140] per Hammond J and [260] per Arnold J.
43 Specialised Livestock, above n 41, at [155]-[156]; and Body Corporate 202254 v Taylor [2008] NZCA 317, [2009] 2 NZLR 17 at [66] per William Young P and Arnold J, in relation to the Fair Trading Act 1986; and NZ Bus, above n 41, in relation to business acquisitions under the Commerce Act 1986, where the Court considered possible alternatives to a knowledge-based approach (at [141]-[160] per Hammond J and [266]-[267] per Arnold J. Wilson J agreed with Hammond J as to both reasoning and result and was in general agreement with Arnold J’s observations (at [269]). In this Court, Miller J had concluded that actual knowledge was required: Commerce Commission v New Zealand Bus Ltd (2006) 11 TCLR 679 (HC) at [231]-[235].
44 NZ Bus, above n 41, at [260], citing Yorke v Lucas (1985) 158 CLR 661 (HCA).
contravention, namely that the other person has no right to the property. Even so, I accept that, aside from knowledge of the essential matters making up the contravention, participation must be intentional.
[70] Despite the common ground, Mr Jones submitted that the FMA’s reliance on Mr Mulholland’s duties amounted to “dumbing down” the test to one of negligence. As he submitted, the FMCA does not include the equivalent of the civil penalty provision in s 180(1) of the Australian Corporations Act, which provides that officers as well as directors of a corporation must exercise their powers and discharge their duties with reasonable care and diligence. However, Mr Dixon clearly acknowledged that the FMA has to establish actual knowledge of the essential facts giving rise to the contravention and intentional participation. I accept that the FMA’s references to Mr Mulholland’s duties (under CBLC’s policies or otherwise) were consistent with this acknowledgment; that is, seeking inferences as to his knowledge and intentional participation in a case involving omissions. I also accept Mr Jones’ submission that failing to comply with a duty is only one of the relevant factors to consider when assessing whether conduct was intentional.
[71] In any event, despite the measure of agreement, there remained some dispute as to the precise test or its application:
(a)In relation to actual knowledge of the essential facts giving rise to the contravention:
(i)Mr Dixon accepted in this Court that for fair dealing cases, there must be knowledge that the representation is misleading or deceptive or likely to mislead or deceive, is false or misleading, or is unsubstantiated (as applicable under each section);45
45 Specialised Livestock, above n 41; Body Corporate 202254 v Taylor, above n 43, at [66]; and Megavitamin Laboratories (NZ) Ltd v Commerce Commission (1995) 6 TCLR 231 (HC), relating to equivalent provisions in the Fair Trading Act 1986. Given these authorities, the FMA did not seek to argue otherwise in this Court but may seek to do so in a higher court. See also Anchorage Capital Master Offshore Ltd v Sparkes [2023] NSWCA 88, (2023) 111 NSWLR 304 [Anchorage Capital] at [329]-[342]; and the discussion of Anchorage Capital in the High Court of Australia’s judgment in Productivity Partners Pty Ltd (t/as Captain Cook College) v Australian Competition and Consumer Commission [2024] HCA 27, (2024) 419 ALR 30 which was the subject of further submissions after the hearing (see below at [83]-[84]).
(ii)however, Mr Dixon submitted that for continuous disclosure cases, knowledge of the facts on which the Court concludes that information is material will suffice,46 whereas Mr Jones submitted the accessory must know the information is material;
(iii)there is a further dispute about knowledge of the (in)applicability of the safe harbours.47
(b)In relation to participation:
(i)Mr Dixon submitted that Mr Mulholland must have intentionally engaged in conduct that “implicates” him in the contravention, or which has a “practical connection” to the contravention,48 or which is otherwise “sufficiently related” to the contravention;49
(ii)whereas Mr Jones submitted that Mr Mulholland must have intentionally acted, or omitted to act, in a way that helped or contributed to CBLC’s contravention (that is, there must be a causal link).
[72]I deal with these three disputed issues in turn.
Knowledge of materiality
[73] The first issue is whether, in relation to continuous disclosure, it is necessary for the FMA to establish that Mr Mulholland knew the information was material. As indicated, counsel were not aware of any New Zealand case on point.
46 Nevertheless, given the uncertainty of the law on this point, the FMA ran its case on the basis that it would satisfy the Court that Mr Mulholland knew that the information was material.
47 Again, given the uncertainty on this point, the FMA ran its case on the basis that it would satisfy the Court that Mr Mulholland knew that none of the pleaded safe harbours applied.
48 Citing Australian Securities and Investments Commission v GetSwift Ltd [2021] FCA 1384 at [1793] and [1795], which cited (inter alia) the Full Federal Court in EYZ Accounting 123 Pty Ltd v Fair Work Ombudsman [2018] FCAFC 134, (2018) 360 ALR 261 at [11].
49 Citing Australian Competition and Consumer Commission v SensaSlim Australia Pty Ltd (in liq) (No 5) [2014] FCA 340, (2014) 98 ACSR 347 at [543], albeit that paragraph states “there must be, at least, some practical involvement by the person in the acts or omissions constituting the contravention”.
[74] A similar issue arose in NZ Bus in the context of accessory liability for a breach of s 47 of the Commerce Act 1986 concerning a business acquisition which the Commerce Commission alleged would substantially lessen competition. In the Court of Appeal, Hammond J said that although the relevant accessory liability section in that case provided an overall framework, it did not necessarily provide a “one-size-fits-all” solution.50 As Arnold J said, a finding that s 47 has been contravened requires an evaluative assessment on the part of the Court, taking into account a wide range of facts and circumstances.51 This creates difficulties even on the orthodox approach as any finding that a contravention of s 47 has occurred would be based on a wide range of “essential facts”, and it would be necessary to show that the alleged accessory knew all these “essential facts” that led the Court to conclude that the acquisition breached s 47.52 Moreover, he said that an approach to accessory liability which does not recognise the difficulty of predicting with assurance whether a particular merger or acquisition will be held to contravene s 47 may result in the scope of accessory liability being widened to the point that it has a “chilling” effect.53 In the event, the Court determined that whatever test was adopted, there was no accessory liability.
[75] In Australia, the issue has arisen in the Federal Court in several first-instance cases. In Australian Securities and Investments Commission v Sino Australia Oil and Gas Ltd (in liq) (Sino),54 Davies J had to determine whether Mr Shao was liable under s 674(2A) of the Corporations Act, which applies to a person who is “involved in a listed disclosing entity’s contravention”. After setting out the definition of “involved in a contravention” that appears in s 79 of the Corporations Act (which is in equivalent terms to s 533 of the FMCA), Davies J said:55
Thus, to find that Mr Shao was “involved” in the company’s contravention of s 674(2), the Court needs to be satisfied that Mr Shao: (i) knew that the company’s profit had deteriorated in the second half of the 2013 calendar year; and (ii) knew that this was information which was not generally available and was information which a reasonable person would have expected, if it were
50 NZ Bus, above n 41, at [146], referring to s 83 of the Commerce Act for business acquisitions.
51 At [261]-[263].
52 At [263].
53 At [265]. As Mr Dixon noted, such a concern does not arise in the context of the Financial Markets Conduct Act – at least in the context of continuous disclosure – where the counterfactual is not fewer individuals becoming directors; but instead, more disclosure to the market.
54 Australian Securities and Investments Commission v Sino Australia Oil and Gas Ltd (in liq) [2016] FCA 934, (2016) 115 ACSR 437.
55 At [54]. No doubt given the admissions in that case, this was the only discussion of the test.
generally available, to have had a material effect on the company’s share price. Mr Shao in his defence admitted the second element and made partial admissions about the matters of which he had knowledge.
[76] In Australian Securities and Investments Commission v Vocation Ltd (in liq) (Vocation),56 the Australian Securities and Investments Commission (ASIC) submitted to Nicholas J that in Sino Davies J was in error. After referring to the legislative history, and authorities including Yorke v Lucas,57 Nicholas J did not accept ASIC’s submission that knowledge of the underlying facts was sufficient to found liability under s 674(2A).58
[77] In Australian Securities and Investments Commission v Big Star Energy Ltd (No 3) (Big Star),59 ASIC submitted that in Vocation Nicholas J was wrong. Banks-Smith J reviewed the authorities since Yorke v Lucas,60 noted the applicable “plainly wrong” approach to departing from precedents in the Federal Court, and concluded that Davies J and Nicholas J were not plainly wrong.61
[78] In Australian Securities and Investments Commission v GetSwift Ltd (GetSwift),62 ASIC argued that it was sufficient to prove that the accessory ought to have known that a reasonable person would expect that the information, if it had been generally available, would have had a material effect on the price or value of the relevant securities. Lee J did not accept that submission,63 agreeing with Banks-Smith J in Big Star.
[79] Mr Dixon also relied on the recent decision of the Full Court of the Federal Court of Australia in Productivity Partners Pty Ltd (t/as Captain Cook College) v Australian Competition and Consumer Commission, which concerned accessory liability for unconscionable conduct.64 It was not a breach of continuous disclosure
56 Australian Securities and Investments Commission v Vocation Ltd (in liq) [2019] FCA 807, (2019) 371 ALR 155.
57 Yorke v Lucas, above n 44.
58 At [619].
59 Australian Securities and Investments Commission v Big Star Energy Ltd (No 3) [2020] FCA 1442, (2020) 389 ALR 17.
60 Yorke v Lucas, above n 44.
61 At [485].
62 GetSwift, above n 48.
63 At [1805]-[1806].
64 Productivity Partners Pty Ltd (t/as Captain Cook College) v Australian Competition and Consumer Commission [2023] FCAFC 54, (2023) 297 FCR 180.
case. In that case, accessory liability was also based on the phrase “in any way, directly or indirectly, knowingly concerned in, or party to, the contravention”. In the appeals, one ground related to the requisite knowledge for accessory liability. The majority judgment of Wigney and O’Bryan JJ rejected the appellants’ submission that the primary judge erred in law in concluding that knowledge of all the circumstances by which the conduct is ultimately found to have been unconscionable is sufficient to establish knowing involvement in unconscionable conduct. Further, their judgment rejected the appellants’ submission that it is also necessary to know of the “unconscionable character” of the conduct arising from those circumstances or that the relevant conduct was in breach of the “applicable normative standard” (although it was not necessary for the alleged accessory to understand that the conduct contravened the prohibition on unconscionable conduct in the statute). Referring to the submissions, the joint judgment said:65
They find no support in the authorities concerning misleading and deceptive conduct, nor in any authorities concerning unconscionable conduct, and are wrong in principle. A requirement that an accessory must know that the impugned conduct breaches the standards or norms of behaviour required by the law of unconscionable conduct is in all practical senses equivalent to a requirement that an accessory must know that the impugned conduct breaches the law. Such a requirement has always been eschewed by the courts.
[80] The joint judgment continued with a comprehensive (and most helpful) review of the Australian authorities, beginning with Yorke v Lucas,66 and concluded that:67
All of the above authorities are consistent with the principle that accessorial liability is dependent upon knowledge of facts, not knowledge of legal obligations or the content of legal standards. Otherwise, persons who are ignorant of the law, or ignorant of the standards or norms of behaviour required by the law, would avoid liability for their participation in wrongful conduct. Consistently with the observation of Heerey J in Coggin, it would be perverse if the morally obtuse avoided liability for their involvement in unconscionable conduct by reason that they subjectively lacked a sufficient commercial conscience.
[81]The other Judge, Downes J, did not address this aspect of the appeals.
65 At [299].
66 Yorke v Lucas, above n 44. Even the review of the misleading and deceptive conduct cases, including Yorke v Lucas, differentiates between requiring knowledge of the circumstances that render the representation false and knowledge that the conduct breaches the statutory standard.
67 Productivity Partners, above n 64, at [313].
[82] By reference to Productivity Partners and NZ Bus, Mr Dixon submitted that the FMA must establish that Mr Mulholland knew the facts on which this Court concludes that the information was material information, but not that he knew it to be material information. Mr Dixon submitted that whether or not information is material is inherently an evaluative conclusion or a matter of judgment, rather than a simple fact. He also submitted this approach is appropriate given the purposes of the FMCA and the continuous disclosure regime, which he submitted are more readily achieved by holding directors and senior officers to account when this test is met, and to give the affirmative defences under s 503 some meaningful work to do.
[83] After the hearing, counsel made further submissions following the High Court of Australia’s judgment in Productivity Partners Pty Ltd (t/as Captain Cook College) v Australian Competition and Consumer Commission,68 and a further recent decision of the Federal Court of Australia, Australian Securities and Investments Commission v Noumi Ltd (No 4) (Noumi).69
[84] In Productivity Partners, the High Court of Australia dismissed the accessories’ appeals. The separate judgments refined the requirements as to the accessories’ knowledge of the principal’s unconscionable conduct. The joint judgment of Gageler CJ and Jagot J said that it was not necessary for the accessory to know that the impugned conduct was unconscionable for him to be found to have been knowingly concerned in the contravention. The question whether conduct is unconscionable or not is one of characterisation, not fact. To be knowingly concerned in the contravention it was necessary only that it be proved that the accessory knew the essential matters which together made up the conduct ultimately characterised by the primary judge and the Full Court as unconscionable, not that he knew that the conduct could, let alone would, be so characterised.70 Gageler CJ and Jagot J said:71
This is why the Court of Appeal of the Supreme Court of New South Wales was right in Anchorage Capital to conclude that the alleged accessories had to know that the representation was false and the circumstances in which the representation was made. But in saying that “[w]here the contravention is the
68 Productivity Partners, above n 64.
69 Australian Securities and Investments Commission v Noumi Ltd (No 4) [2024] FCA 1192.
70 At [12], and [82]-[83]. See also Gordon J at [148]-[150] and [153]-[154], and Beech-Jones J at [339], [341] and [360].
71 At [83].
prohibition on engaging in misleading or deceptive conduct, one can be ‘knowingly concerned’ in it only if one knows that the conduct is misleading or deceptive”,72 their Honours are not to be misunderstood as saying that the person had to know that the conduct (the false representation) was capable of being, or would be characterised as, misleading or deceptive or as conduct proscribed by s 18 of the ACL. In context, it is apparent that their Honours meant only that the person had to know the representation was false (mere knowledge of facts from which a person might have deduced or inferred falsity being insufficient) and the circumstances in which the representation was made. Knowledge of the potential or actual character, quality, nature, or status of the conduct as misleading or deceptive for the purposes of the statutory prohibitions against such conduct was not required.
[85] In Noumi, in the context of accessory liability for continuous disclosure contraventions, Jackman J in the Federal Court recently summarised the position as follows:73
In order for a person to be knowingly concerned in a contravention, that person must have been an intentional participant, with actual knowledge of the essential elements constituting the contravention: Yorke v Lucas (1985) 158 CLR 661 at 670 (Yorke); Productivity Partners Pty Ltd v ACCC [2024] HCA 27; (2024) 98 ALJR 1021 (Productivity Partners) at [12] and [82] per Gageler CJ and Jagot J; Gordon J at [154] (Steward J agreeing at [308]); Edelman J at [263]; Beech-Jones J at [339], [351]–[352], [364]–[365] (Gleeson J agreeing at [211]). However, it is not necessary to prove that the accessory knew that the company was in breach of its continuous disclosure obligation: Productivity Partners at [83] per Gageler CJ and Jagot J.
consideration of the two matters would result in a change of greater magnitude in the Appointed Actuary’s final report. Adjustment was not going to move the estimated required strengthening below approximately $100m.
[853] As the Guidance Note states, if an issuer is able to determine that it holds material information based upon incomplete information, that information must be immediately disclosed to the market, regardless of the fact that there may be additional information to follow. The issuer cannot simply wait until it has received all information concerning a material event before a disclosure obligation arises. Similarly, if receipt of the Appointed Actuary’s report is treated as an event, as the Guidance Note states, an issuer is required to immediately disclose upon becoming aware that the event will occur instead of waiting until the event has occurred.165 However characterised, CBLC was aware on 25 January 2018 of material information concerning the need for reserve strengthening of this magnitude. Against the background of PwC’s earlier updates, the need for immediate disclosure should have been referred to the Board without delay. Mr Harris and Mr Mulholland had been reminded of the need for immediate disclosure on 19 January 2018 (at [646] above). CBLC could not further delay Board consideration of disclosure.
[854] Even if the magnitude was uncertain on 25 January 2018, it was confirmed on 27 January 2018 when Mr Coulter emailed Mr Ray referring specifically to $100m (at [655] above).
Was the information not generally available to the market?
[855] Mr Mulholland accepted that CBLC did not make any announcement about reserve strengthening between 24 August 2017 and 5 February 2018.
Would a reasonable person expect the information, if it were generally available to the market, to have a material effect on the price of CBLC shares?
[856] It is not disputed that information that CBLI’s reserves needed strengthening by approximately $100m was material. I consider it clearly was material information. This is evident at least from the prominence of reserving in the “risks” section of the
165 At 3.6.
PDS and PFI (at [231]-[232] above), the fact that reserving changes affect profit and loss, regulatory concern about reserving and the sharp share price fall following the reserve strengthening announcement on 18 August 2017.166 As Mr Pigou said, disclosure was particularly required given CBLC’s profit expectation that was out in the market (from 24 August 2017, at [423]-[426] above).
Did the information relate to CBLC shares in particular rather than to financial products generally or listed issuers generally?
[857] It was not disputed, and I consider, that this information related to CBLC shares in particular.
Did any of the safe harbour exceptions to disclosure apply?
[858] Mr Mulholland submitted that an exception to the Listing Rules applied until 31 January 2018 on the basis that:
(a)a reasonable person would not expect the need to strengthen reserves by $100m to be disclosed when there was significant uncertainty about the quantum and accuracy of the figures;
(b)the need to strengthen reserves by $100m was confidential and confidentiality was maintained;
(c)the need to strengthen reserves by $100m comprised matters of supposition or was insufficiently definite to warrant disclosure; and
(d)on 31 January 2018 PwC provided a final draft report. On this date materiality crystalised.
166 On the day of that announcement CBLC’s share price fell by 9.8% from the previous day’s closing price compared with a 0.04% increase in the S&P/NZX50 index. The price fell by 13.8% between 17 and 25 August 2017 compared with a 0.2% decline in the S&P/NZX50 index. The volume of trading was also significant, particularly given that 60% of CBLC’s shares at the time were held by directors, employees and related parties combined. CBLC was included in the S&P/NZX50 index from 19 June 2017, making it one of the larger NZX-listed companies by market capitalisation, and therefore one to which the 5% threshold for material information in the Guidance Note for “issuers with large market capitalisations” (see [53] above) could apply, but it was still one of the smaller companies by market capitalisation in that index.
[859] The only evidence indicating the Board considered the safe harbour exception relating to confidentiality was the reference to RBNZ confidentiality in the 3 August 2017 Board meeting (at [357] above) and the 12 December 2017 meeting with RBNZ (at [604] above). In any event, the information that reserves needed strengthening was not confidential in the sense that its release by CBLC would be a breach of law based on RBNZ or any other confidentiality. PwC was engaged by the CBL Group.
[860] I also consider the need for reserve strengthening was sufficiently definite to warrant disclosure on 25 January 2018. A reasonable person would expect the information to be disclosed. Given the nature of PwC’s reporting, saying nothing until the report was finalised was not a legitimate option. Use of the label “draft” is not determinative (and indeed CBLC did not wait for PwC’s final valuation report, which only came later in February). I accept that CBLC could have disclosed the material information in various ways. For example, it could have said that based on PwC’s update, it expected CBLI’s reserves needed strengthening by approximately $100m and that it would make a further announcement once the exact number was known. It could have said that based on PwC’s update the total prior impact proposed was
$112m, but PwC had agreed to consider two matters such that the $112m may change, and that it would make a further announcement once the exact number was known.
Immediate release?
[861] Mr Pigou gave evidence that, following PwC’s advice on 25 January 2018, an investor would have expected disclosure of this information on or soon after 25 January 2018. Mr Pilkington considered that CBLC should have discussed a proposed market announcement and been ready to announce on 25 January 2018.
[862] Even if the need for reserve strengthening of approximately $100m was not sufficiently certain before 25 January 2018, given the increasingly clear indications by PwC to CBLC over the preceding months, CBLC should have prepared and discussed a draft market announcement so that disclosure could be made immediately when the position was sufficiently certain. Urgency was required and I consider that CBLC should have disclosed what it could about the need for material reserve strengthening
on 25 January 2018, or at least overnight. The exact amount could have been updated immediately after the further PwC advice on 27 and 30 January 2018.
[863] Even if the information was insufficiently certain on 25 or 27 January to warrant disclosure, CBLC should have prepared in this way so that disclosure could have followed immediately upon receipt of PwC’s updated position on 30 January (an email at 1:55 pm advising that they had made further adjustments resulting in a $98m increase in reserves and that they were proceeding to produce a valuation report on that basis, followed by the updated slide pack at 3:02 pm),167 thus avoiding further delay. Mr Pilkington said he would have expected a same-day release. If necessary, an urgent Board meeting should have been arranged in advance. However, there was no evidence of preparation of a draft announcement between 25 and 30 January 2018. CBLC did not comply with its obligation to make immediate disclosure.
[864] Instead, Mr Harris emailed the Board at 7:14 pm on 30 January calling a Board meeting the next evening (31 January) at 7:00 pm. CBLC then told RBNZ before lunchtime the next day (1 February),168 but had still not made an announcement a further 24 hours later (on 2 February) when it was placed in trading halt (after RBNZ had met with the FMA, who then contacted NZX).169 It is evident from the detailed nature of Mr Harris’ email to the Board and the nature of the discussion with RBNZ that, after receipt of PwC’s updated position on 30 January, CBLC made plans to address the need for reserve strengthening with a capital raise which delayed disclosure of the information itself. The proposed capital raise meant that CBLC (initially) considered it needed RBNZ confidentiality lifted, but this did not excuse delaying disclosure of the need for reserve strengthening itself. Rather than delaying for days while it tried to solve the problem, CBLC should have disclosed what it could immediately after an urgent Board meeting, and indicated that it would disclose its more detailed remediation plan as soon as possible thereafter.
[865] Even if the information was insufficiently definite until 30 January, CBLC’s delay from that date, which was extended further after the trading halt was imposed,
167 At [658]-[660] above.
168 At [689] above.
169 At [703].
also would not have complied with its obligation to make immediate disclosure. As Mr Pigou said, there was a total of almost three business days between PwC’s landing on 30 January and the trading halt on 2 February. Non-disclosure during this period did not accord with the requirement to disclose material information immediately.
Conclusion
[866]I conclude that this primary contravention is established.
Involvement (eighth cause of action)
Did Mr Mulholland know of the relevant information?
[867] Mr Mulholland admits knowing on 25 January 2018 that some form of significant strengthening was likely, but not the level. He admits knowing this information on 31 January 2018. Given that Mr Mulholland met with PwC and received their update on 25 January 2018, and the background knowledge he had about their reserving work, he knew at least as much as Mr Harris and Mr Hannon who also attended the meeting. Mr Mulholland must have known that the level of significant reserve strengthening required was approximately $100m. I address any residual uncertainty further in relation to the safe harbour exception below.
Did Mr Mulholland know that the information was not generally available to the market?
[868]This is admitted.
Did Mr Mulholland know that the information was information which a reasonable person would have expected, if it were generally available to the market, to have had a material effect on CBLC’s share price?
[869] Mr Mulholland admits that he knew on 31 January 2018 that the information was material but said he did not recall whether he knew before then (which differed from his evidence referred to above) and that the PwC number was in draft, changing and uncertain.
[870] I accept that Mr Mulholland believed there was no imminent prospect of CBLI failing to meet claims as they were made and that the issues being raised about reserving related to potential claims that might be made years in the future. However, he accepted the indications were that the need for strengthening of reserves was going from bad to worse. He must have known by 25 January 2018 that the amount of reserve strengthening needed was a material number even though the exact figure was still being finalised. He accepted that anything in the range of $67m-$120m earlier identified would be material, and he had no reason to consider on 25 January that the amount might reduce so much that it would not be material. Indeed, he requested a meeting on the morning of 30 January – before PwC’s 30 January update – to discuss the solvency issue, saying that on the current reserving for CBL, “we will be under 100%” (at [657] above). He knew the share price had fallen in August 2017 following a smaller reserve strengthening announcement. Mr Mulholland must have known this information was material.
Did Mr Mulholland know the information related to CBLC shares in particular rather than to financial products generally or listed issuers generally?
[871] It was not disputed, and I consider, that Mr Mulholland knew this information related to CBLC shares in particular.
Did Mr Mulholland know that the information was not information that was exempted from disclosure by the safe harbour exceptions in the Listing Rules that he raised?
[872] Mr Mulholland said he did not recall whether at the time he thought a safe harbour exception applied to this information. Mr Jones submitted that PwC did not land on final figures for its report on CBLI’s reserves until 30 January 2018, and did not provide a final draft of that report until 31 January 2018.
[873] I do not accept that Mr Mulholland believed until 30/31 January 2018 that reserve strengthening was a matter of supposition or insufficiently definite to disclose. If he had any misunderstanding, it did not relate to the information itself, but was a mistake of law that disclosure was not required at all until the year-end announcement or at least until CBLC received PwC’s finalised numbers or valuation report. That is not the effect of the continuous disclosure regime. PwC’s actuarial update on 25 January 2018 (even though marked “Draft”) amounted to material information
provided in advance of the full valuation report. The valuation report (also marked “DRAFT”) was provided on 31 January 2018 after Mr Harris had called a Board meeting. Further, Mr Griffiths’ email of 19 January 2018 (at [647] above) did not support such an erroneous view – it focused on the requirement for immediate release. Mr Mulholland must have known the safe harbour exceptions did not apply.
Did Mr Mulholland know that the information was not immediately released?
[874] For the reasons given, I am satisfied Mr Mulholland knew that CBLC did not immediately release this information. He was involved in the key events during the period from 25 January to 2 February 2018.
Did Mr Mulholland intentionally participate by acts or omissions that had a practical connection with the contravention?
[875] Here too, Mr Mulholland submitted that he did not participate in CBLC’s contravention; he did not “decide” to defer disclosure. He submitted that notwithstanding any obligation in the Continuous Disclosure Policy, the Board was seized of the issue.
[876] I accept, as indicated, the Board had not delegated decisions about disclosure. The Board had ultimate responsibility for ensuring that CBLC complied with its disclosure obligations. Mr Mulholland had no authority to make disclosure to the market himself. I also accept the Board was aware of this information by the evening of 30 January 2018. But the prior issue concerns what happened before 30 January 2018.
[877] The relevant background includes the emails from Mr Griffiths to Mr Harris and Mr Mulholland on 18 and 19 January 2018 relating to the continuous disclosure obligation.170
[878] I accept that two Board members – Mr Harris and Mr Hannon – received the same information as Mr Mulholland from PwC on 25 January 2018. Applying the same approach as above (at [791]-[793]), there is no evidence that on or about
170 At [645]-[648] above.
25 January 2018 the information was passed to the full Board or that Mr Harris or Mr Hannon – or the Board – considered immediate disclosure of this information. Mr Mulholland must have known that the Board had not considered the need for continuous disclosure given his role as CFO and involvement with the reserve strengthening issue as well as disclosure.
[879] Mr Mulholland does not suggest he took any steps on 25 January 2018 (or subsequently) to raise with Mr Harris or anyone else at CBLC the need for the Board to consider immediate disclosure of PwC’s update that CBLI’s reserves needed strengthening by approximately $100m. Accepting that Mr Harris and Mr Hannon could and should have taken steps to raise the issue, Mr Mulholland should have raised the need for a market announcement at this time, as he had in December 2017, especially given CBLC’s previous market guidance. I consider that his failure as CFO and a member of the Disclosure Committee to raise the need for immediate disclosure with Mr Harris, the Disclosure Committee or the Board was an omission that had a practical connection with CBLC’s contravention. By the time Mr Mulholland was considering the need for disclosure after the trading halt on 2 February 2018, it was already too late. But Mr Hannon’s email that day (at [706]-[707] above) indicates that the Board was looking to Mr Mulholland for advice in relation to the need for continuous disclosure.
Section 503 defence
[880] Mr Mulholland submitted he has a defence under s 503 of the FMCA on the basis that he reasonably relied on information supplied by others and/or took all reasonable steps to ensure that CBLC complied with its continuous disclosure obligations. I do not accept this defence is made out in relation to this information. Given my earlier findings, I do not consider Mr Mulholland reasonably relied on advice or information from others, and there was no evidence that he took reasonable steps to ensure that CBLC complied with its continuous disclosure obligations.
Conclusion
[881]I conclude that Mr Mulholland was involved in this contravention.
Alternative cumulative claim (twenty-third and twenty-fourth causes of action)
[882] Given my findings in relation to other primary contraventions, it is unnecessary to address the FMA’s alternative claim alleging a failure to disclose the cumulative material effect of the information concerning receivables, directions and conditions issued by CBI, and reserving. There are further reasons why I decline to address it even in the alternative. First, it would require more detailed consideration of, and further factual findings in relation to, a number of parts of the FMA’s pleading relating to matters between July 2017 and January 2018 that were not pursued in their own right given the narrowed claim. Secondly, the FMA’s materiality evidence did not readily lend itself to analysis of CBLC’s alleged non-disclosures together on a chronological basis, nor identify with any precision when an investor would expect the combined effect of the information about the various elements to have a material effect on the CBLC share price. These fell into separate and distinct categories –relating to profit and loss, solvency and regulatory action. Accepting that materiality of any information is to be determined by reference to its expected effect on the share price, Mr Pigou fairly said it was difficult to define a date by which the combined effect of the information would have become material albeit he was confident that it would have been much sooner than 5 February 2018.
Result
[883]I make declarations of contravention as follows:
(a)in relation to the eighth cause of action, a declaration pursuant to s 486(1)(b) of the FMCA that from 25 January 2018 Mr Mulholland was involved in CBLC’s contravention of a s 385 pt 5 market provision, specifically s 270, by failing to cause CBLC, a listed issuer, to disclose that CBLI’s reserves needed strengthening by approximately $100m;
(b)in relation to the tenth cause of action, a declaration pursuant to s 486(1)(b) of the FMCA that from 24 August 2017 Mr Mulholland was involved in CBLC’s contravention of a s 385 pt 5 market provision, specifically s 270, by failing to cause CBLC, a listed issuer, to disclose
the existence of approximately $35m of premium receivables due to CBLI that were over a year past due and their solvency impact; and
(c)in relation to the twenty-second cause of action, a declaration pursuant to s 486(1)(b) of the FMCA that in January 2018 Mr Mulholland was involved in CBLC’s contravention of a s 385 pt 5 market provision, specifically s 270, by failing to cause CBLC, a listed issuer, to disclose the CBI direction to CBLIE to apply a capital add-on essentially requiring it to hold additional cash reserves of €31.5m.
[884] I direct the registry to allocate a one-day pecuniary penalty hearing and make timetable directions as follows:
(a)The FMA is to file and serve its submissions as to penalty 10 working days before the hearing; and
(b)Mr Mulholland is to file and serve his submissions as to penalty 5 working days before the hearing.
Costs
[885] My preliminary view is that the FMA is entitled to 2B costs and reasonable disbursements. If costs cannot be agreed, counsel may file memoranda not exceeding five pages and I will determine costs on the papers.
Gault J
Solicitors / Counsel:
Mr JCL Dixon KC and Mr W Potter (for the plaintiff Financial Markets Authority), Barristers, Auckland
Ms JEM Greer, Financial Markets Authority, Auckland
Mr J Caird, Ms N Blomfield and Ms C G Paterson (plaintiff’s instructing solicitors), Simpson Grierson, Auckland
Mr DPH Jones KC (for the 8th defendant Carden James Mulholland), Barrister, Auckland Mr DCS Morris and Ms S Cameron (8th defendant’s instructing solicitor), CM & Associates, Auckland
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