Most securities offences are committed by companies, and a fine on the company comes out of shareholders’ or unit holders’ money. The Capital Market Act 2015 therefore reaches past the company to the people who ran it.
The deeming rule: section 456
Where an offence against the Act or its regulations “has been committed by a body corporate”, any person who at the time “was a director, a chief executive officer, an officer or a representative of the body corporate or was purporting to act in such capacity, is deemed to have committed that offence unless he proves that the offence was committed without his consent or connivance and that he exercised all such diligence to prevent the commission of the offence as he ought to have exercised, having regard to the nature of his functions in that capacity and to all the circumstances”.
The rule reverses the burden: once the company’s offence is proved, the director is guilty unless he proves both no consent or connivance (he did not agree or turn a blind eye) and due diligence (he took the steps a person in his position ought to have taken). The net is wide. “Officer” is defined in section 2 to include any director, secretary or employee, and a receiver and manager or voluntary liquidator. “Representative” covers anyone acting for a licensed firm in a regulated activity other than clerical staff.
Section 456(4) extends “director” to anyone occupying or acting in the position of director “by whatever name called, and whether or not validly appointed”, and to a person “in accordance with whose directions or instructions the directors of the corporation are accustomed to act”. The founder who resigned but still tells the board what to do is a shadow director and exposed.
Employers and licence holders
The deeming works in the other direction too. Under section 456(2), where an employee contravenes the Act, the person for whom the employee acts is deemed to have contravened it. Under section 456(3), where a representative of a capital market licence holder contravenes the Act, the licence holder is deemed to have done so. A fund manager is therefore liable for its dealer’s insider trading, and its directors are then exposed under section 456(1). Compliance systems, training records and board minutes are the evidence the defence depends on.
Specific penalties for directors of trustees
Part V names directors in the penalty itself, so no deeming is needed. Every director of a trustee is personally liable to a fine of up to K1,000,000 or five years’ imprisonment, or both, where the trustee misapplies or fails to bank scheme assets (section 194(4)), fails to comply with the trust deed or the Act (section 196(3)) or acquires units in its own scheme on improper terms (section 197(2)). Where a trustee wrongly pays the cost of a members’ meeting from scheme assets and fails to repay three times the amount, every director and the chief executive is liable to pay that treble amount or to ten years’ imprisonment, or both (section 215(6)). Directors and the chief executive face up to K1,000,000 or five years for failing to send meeting communications to the auditor (section 220(2)), and each director up to K100,000 or two years for failing to keep minute books (section 248(5)) or allowing withdrawals contrary to the deed (section 257(4), where the term is seven years). See duties of a trustee’s officers.
The Securities Commission Act
Section 104 of the Securities Commission Act 2015 provides that a convicted body corporate is liable only to the fine, and that any person who was a director, chief executive officer, chief financial officer or secretary at the time, or purported to act as such, “shall be deemed to be guilty of that offence”. Unlike section 456 of the Capital Market Act, section 104 states no due diligence defence on its face. Whether a court would read one in is untested.
Removal, disqualification and fitness
Conviction is not the only consequence. On the Commission’s application the National Court may order that a chief executive or director be removed from office or barred from managing any public company for a period it determines (section 449(1)(p)). Section 378 is specific to listed corporations: where a director or chief executive has been convicted under a securities law, has had civil action taken against him under sections 323 to 325, 334, 335 or 445, or has compounded an offence under section 462, and his conduct makes him unfit, the Commission may apply for his removal or a bar from any public company. The published text joins the three grounds with “and”, and subsection (5) refers to “Section 423, 424”, apparently for 323 and 324; a court would have to resolve both points.
For licensed firms, section 51 requires every director to be a fit and proper person and every chief executive to be approved by the Commission. The grounds in section 41(1)(d) to (l) include bankruptcy, dishonesty convictions, conviction under a securities law, previous Commission action under sections 443 to 445, and conduct casting doubt on competence or judgment. The Commission may direct a licence holder to remove a director or chief executive (section 51(9)). Under section 443(3)(f) the Commission may also freeze a director’s trading or publicly state that his retention in office is against the public interest. See who can be a director of a licensed firm.
Directors of an issuer are personally liable to compensate investors for a false or misleading prospectus under section 144, and the general duties of directors under the Companies Act 1997 continue to apply. See prospectus liability.
Sources
- Capital Market Act 2015 — ss 2 (“director”, “officer”, “representative”), 41, 51, 144, 194, 196, 197, 215, 220, 248, 257, 378, 443, 449, 456, 462
- Securities Commission Act 2015 — s 104
- Companies Act 1997
Before relying on anything here, read the current text of the Capital Market Act 2015 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.