Councillors might think that they are immune from any claim for damages because of the way that they acted as Councillors which resulted in a loss to Council. The reality is that Councillors can be personally liable for the losses suffered by the Council in two ways:
1. Under the Common Law.
This is basically the unwritten law of the land made by judges over the centuries and based on legal precedents or case-law.
Those in positions of responsibilites are deemed to have a duty of care in relation to others. A duty of care is defined as
A requirement that a person act toward others and the public with watchfulness, attention, caution and prudence that a reasonable person in the circumstances would. If a person's actions do not meet this standard of care, then the acts are considered negligent, and any damages resulting may be claimed in a lawsuit for negligence.
Thus company directors have a duty of care towards their shareholders, and councillors have a duty of care towards their ratepayers.
The essence of s duty of care is that the person on whom the obligation is placed must act in a manner that is reasonable for a person in his position. From time to time courts decide what they consider to be reasonable in different circumstances. Thus the recent Nathan's Finance case, the court clarified the duty of care that directors have to shareholders. Although there are no cases in New Zealand it is thought that the courts would interpret the duty of care of councillors in much the same way.
To read my previous two articles on liability under the Common Law go here.
2. Under the Local Government Act 2002
Councillors also have personal liability under the Local Government Act for an act, or failure to act, that causes a loss to the local authority. This is discussed in detail in the article below:
Note that the Act refers to councillors as "elected members" or simply "members". My comments are in blue.
Members liability for losses
Pursuant to section 44 of the Local Government Act 2002, the Crown can take proceedings against members. Members may be (jointly and severally) liable for the losses of local authorities in the following cases:
(a) Money belonging to, or administrable by, a local authority has been unlawfully expended.
(b) An asset has been unlawfully sold or otherwise disposed of by the local authority.
(c) A liability has been unlawfully incurred by the local authority.
(d) A local authority has intentionally or negligently failed to enforce the collection of money it is lawfully entitled to receive.
Jointly and severally means that they are liable as a group and individually as well. This gives the prosecution the option of suing all of the members who are culpable or just those that it selects. Selection is based on which defendants have the wherewithal to satisfy the award of damages.
The provisions are far-reaching. Any unauthorised expenses are covered. Any liability, including debts are covered. Money that the local authority has failed to collect could cover the failure to set, charge and collect rates in compliance with the law.
Pursuant to section 46(4), individual members are not liable if they establish that the act or failure to act that resulted in loss occurred:
(a) Without their knowledge.
(b) With their knowledge but against their protests.
(c) Contrary to the manner in which they voted on the issue.
(d) More generally, members are not liable if they establish that in the circumstances, they acted in good faith and in reliance on reports, information, or professional or expert given by:
(i) An employee of the local authority whom they reasonably believed was reliable and competent in relation to the matters concerned.
(ii) A professional adviser or expert in relation to matters that they reasonably believed to be within the person’s professional or expert competence.
The essential defences are that the members did not know what was going on, or that they expressed their clear opposition to the event causing the loss. Note how important expressing opposition is when judgment day comes. Also, the importance of how a member voted on matters which end up causing losses to the Council. Those divisions called by Councillor Larsen when Council resolutions are passed are going to be of utmost evidential importance.
Good faith is absolutely vital to a defence. If members believe that they are merely a rubber stamp to endorse the actions of the Chief Executive then they have a complete misunderstanding of their duty of care and are likely to find themselves culpable and liable for damages.
Members cannot blindly rely on the advice of employees (read Chief Executive), or advisers (read Bell Gully) and abdicate all responsibility. They have to reasonably believe that the Chief Executive was competent and reliable. That would be hard to establish where the Council's own lawyers had acknowledged the illegality of the rating documents prepared by the Chief Executive, as well as all the rates assessments; where the Auditor-General had criticised the Council's rating process; and where the Chief Executive himself had admitted that the rates process for three years was "flawed".
It is hard to imagine a good faith defence when the members passed the recent rates resolution in spite of having been advised that the rating documentation did not make sense, was noncompliant with the law, and did not include the amendments suggested by their own lawyers and the Auditor-General.
When it comes to legal advice, members are entitled to rely on it. However, they are not entitled to rely on the Chief Executive's representations of what that legal advice is. They must see it for themselves. In a situation where the legality of a proposed action by Council is being challenged, members have a duty to scrutinise the legal advice for themselves. Relying on vague, misleading advice from the Chief Executive that Council was acting on advice from the Council's solicitors is not going to cut the mustard in a court of law.
Passing a resolution to deny themselves access to the legal opinions of Council's lawyers is a clear indication that members have abdicated from any responsibility for Council's actions and abandoned all pretences of acting in good faith.
Members are only liable for the losses if the Auditor-General issues a report on those losses to the Minister of Local Government.
Porter v Magill  1 All ER 465,
In this leading English case, which is the authority on the law, Lord Bingham summarised the principles underlying the equivalent provision in English law as follows:
+ Powers conferred on a local authority may be exercised for the public purpose for which the powers were conferred and not otherwise.
+ Such powers are exercised by or on the delegation of councillors. It is misconduct in a councillor to exercise or be party to the exercise of such powers otherwise than for the public purpose for which the powers were conferred.
+ If the councillors misconduct themselves knowingly or recklessly it is regarded by the law as wilful misconduct.
+ If the wilful misconduct of a councillor is found to have caused loss to a local authority the councillor is liable to make good such loss to the council.
Acts indemnified by the local authority
Those Councillors who believe that they are indemnified by the Council for their actions have misunderstood the situation or have been ill-advised. There is a statutory indemnity but it very limited.
Under s 43(1) of the LGA 2002, members of a local authority are indemnified by the local authority for any liability but, very importantly, only if they acted in good faith and in pursuance of the responsibilities or powers of the local authority:
A member of a local authority (or a committee, community board, or other subordinate decision-making body of that local authority) is indemnified by that local authority, whether or not that member was elected to that local authority or community board under the Local Electoral Act 2001 or appointed by the local authority, for—(a) costs and damages for any civil liability arising from any action brought by a third party if the member was acting in good faith and in pursuance (or intended pursuance) of the responsibilities or powers of the local authority (or committee, community board, or other subordinate decision-making body of that local authority); and (b) costs arising from any successfully defended criminal action relating to acts or omissions in his or her capacity as a member.
Note that members have to act in good faith AND in pursuance of the responsibilities or powers of the local authority. If they fail at either hurdle then they will not be indemnified and will be personally responsible for any loss suffered as a result of their actions.
In situations such as the unit of demand fiasco, where Councillors acted totally outside Council's powers knowing that the legality of their actions was at best questionable and at worst completely illegal (and therefore they were not acting in good faith), it may well be that Councillors will be personally responsible for any losses that they have caused ratepayers. More on that later.
Another look at the liability of company directors 05.09.11
After writing the article below - Search for a scapegoat - I came across a similar article written by William Whittaker in the SundayStar Times of 24 July 2011 about the legal obligations of directors of companies following two landmark decisions on both sides of the Tasman. The Nathan's case in NZ and the Centro case in Australia both consider the obligations and duties of directors.
As I said in the earlier article, Councillors play a very similar role to directors in a company and it may well be that councillors have similar obligations to company directors. So again when reading the comments it might be worthwhile reading "councillors" for "directors" and "council" for "company".
In both cases the directors had relied on advice from other parties, including external advisers and senior management. The article goes on:
"According to the judges, good intentions do not give you a free pass. The courts will expect every director to have sufficient financial literacy to understand, monitor and guide the company. The director must understand the financial status of the company for him or herself."
"Directors should ensure skills and knowledge are current. Do a course. Seek leave from the board to consult an independent adviser. If qualms arise, it is vital they be addressed."
"One other factor came into sharp focus in both cases - exercising independent thought. A director can no longer say that by simply reading the figures that they have reviewed the financial reports. First, the director must have synthesised - processed and understood - the information. Second, they must reach a personal level of satisfaction about the accuracy and probity of the materials they have reviewed. This relates not only to financial matters but also to all matters contained in the board papers or otherwise being dealt with by the company.
"In exercising independent thought, a director should be able to ask the hard questions - and frankly, the dumb questions too - when faced with an intricate report on a company's financial status. They should keep asking questions until they can understand and evaluate the answers received from management."
Again, these comments could have been written about the Councillors at KDC
Sooner or later the McKerchar-Tiller-Geange circus is going to come to an end. From where we sit at the moment the mess that they have created does not look too good. There is a massive debt of size unknown and a large amount of money that has either disappeared down the EcoCare dunny or cannot be accounted for. Perhaps just shoddy accounts, but we do not know, and Council is certainly not going to tell us. There are EcoCare rates that have been levied illegally for the fourth year now and will have to be refunded. There are development contributions that will have to be repaid. There is a draft District Plan that will bleed ratepayers dry if it goes ahead. The spend-up carries on and the debt increases, in spite of the crisis.
However, I suspect that when the experts finally get access to the books we might find that things are even worse than we feared.
The Chief Executive has shown an arrogance only matched by his incompetence in handling the affairs of Council and in responding to criticisms. Ratepayers are already demanding that he be made personally liable for any losses for which he can be legally held responsible. I anticipate that that cry will get louder once the true situation is revealed.
The Mayor and Councillors will also be in the firing line. The Mayor has given tacit support to a Chief Executive who has ruled Kaipara for over 18 years, in many ways like a medieval despot, manipulating his councillors and illegally tithing his vassals, and running the finances in a way that simply does not bear scrutiny. The Councillors themselves have mostly acquiesced in the subordinate role assigned to them and have chosen to turn a blind eye to the excesses and shortcomings of their Chief Executive.
The question that all ratepayers will be asking is: "Can a Chief Executive, a Mayor, a Deputy Mayor, and the councillors be held responsible in law for the losses that a council suffers because of negligence, breach of duty of care, or of malfeasance (deliberate wrongdoing)?
I am sure that the ratepayers of Mangawhai (or the whole of Kaipara if it comes to that) are not going to sit quietly by and pay the extortionate rates that the Council will need to charge them to pay for the EcoCare white elephant that Council has foisted on them, while those responsible for the debacle get off scott-free. Every barrister worth his salt will be engaged to find a scape-goat, or scape-goats and to ensure that the liability for the losses are well and truly shafted home to those who are responsible for them.
Legal Eagle is going to moochie around the law books and see what sort of liability the staff and elected members of a council might have for losses which the council has suffered under their watch. First up, a comment about elected members.
Liability of elected members
A local authority is often likened to a large corporate with the elected members being the equivalent of the Directors of a company, with a Managing Director heading the Board, and with a Chief Executive to carry out the decisions of the Board of Directors. There is not a lot of case law about the legal duties and responsibilities of elected members but it is generally accepted that they are not too dissimilar to those of Company Directors. The role is very much the same and in many instances the undertaking of a local authority is far larger that the average company and the elected members therefore have more responsibility.
Recently, in cases relating to finance company losses, the courts have had a lot to say about the role of company directors and the responsibilites that they owe to shareholders. Last week the Nathans Finance directors were sentenced and the judge made some informative comments about the duties of company directors.
In an article in the SundayStar Times of 4 September 2011 columnist Rob O"Neill has an article headed: Double jailing sends a message to directors. The article could easily apply to the duties of councillors. I have therefore highlighted the word directors where it appears in a quote and I suggest that in reading the extracts it be be replaced with the word councillors.
The article includes the following:
In sentencing, Justice Heath clarified his position on director reponsibilities. It is quite possibly this that the Nathans case will be remembered for - helping to define much more clearly than before that directors can't just sit back and rely on advice. They have to bring their own expertise and skill into play on the decisions before them.
Justice Heath said that although Moses (one of the directors) did voice some concern about the lending to VTl, he did not do enough.
"Actions speak louder than words at the end of the day and your words were little more of a whisper, " he said.
Directors are on notice. They cannot let things pass unquestioned. When they have concerns they need to be raised strongly and repeatedly until they are addressed. Weaker directors cannot allow themselves to be steamrollered by alpha types. They must insist on having full information about their company's activities. Information hoarding cannot be tolerated.
These words could have been written about the Councillors at the KDC and I trust that every Councillor will read the comments and take them on board. Recent cases such as this have clarified the law relating to directors. There are no cases yet about the liability of councillors, but I have no doubt that if a case involving the liability of councillors came to court then the result would be very much the same.
Councillors, you are on notice.