DCHL directors' duties clearly set out in Act

Dunedin City Holdings Ltd chairman Paul Hudson was obliged either to refuse to take on stadium debt obligations or resign, believes Robert Hamlin, of Dunedin.

There has been a great deal of comment in this newspaper recently about relationships between the Dunedin City Council, the mayor and the board of Dunedin City Holdings Ltd (DCHL). The majority of this comment revolves around who said what to whom and when they said it, with regard to DCHL's inability to meet its well-defined dividend obligations to the DCC.

The debate now appears to have crystallised around two personalities, Paul Hudson as chairman of DCHL and Dave Cull as the mayor. Mr Hudson does not seem to have taken the mayor's broad hints, and resigned. The recent announcement of a major reshuffle within the boards of DCHL indicate that the mayor will try to push if Mr Hudson does not jump.

However, there is still much water to go under the bridge.

This board and its chairman seem determined to stay if it is at all possible, and they may yet succeed, if enough councillors can be persuaded to keep faith with them.

With fingers being pointed all round, and things starting to get personal, it is worth taking a look at Mr Hudson's behaviour with regard to his obligations as a director under the Companies Act, rather than by other less well-defined expectations to communicate with other individuals, such as the mayor. These duties are laid out in Sections 131 to 138 of the Act. Many clauses contain all the usual ambiguous fluff about "acting in good faith" etc. However, one clause does seem to possess the capacity to embarrass Mr Hudson and his board colleagues.

Clause 136 deals with a director's duty with regard to their company's obligations. It is admirably short and concise: (136)

"A director of a company must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so."

In 2008, when Mr Hudson and most of the current members of the DCHL Board were already in place, this city was considering building a stadium. The instalment debt necessary for the erection of the building was to be largely financed by obliging DCHL to pay an annual dividend at its existing level (or higher) for the next 20 years. However, as reported in the ODT, Mr Hudson confirmed that he knew the following at the time. -

1) DCHL had established (and communicated to the council in 2006) that it could not sustain even its existing levels of dividend.

2) He was unaware of any other company being asked to predict [and presumably guarantee its dividend at 100% of that income] for 10 to 20 years.

If Mr Hudson is to be taken at his word, then one can only conclude that he must have known in 2008 that DCHL could not deliver, either wholly or in any significant part, on this proposed obligation. Given this, his duties as a director under the Act at the time were absolutely clear. He should have refused to agree to DCHL taking on any such obligation in whatever form, or he should have resigned his position rather than contravene the Act.

Clearly, he did not do so, and neither did any of his colleagues - who must also have known if Mr Hudson did.

The board therefore would appear to be prima facie in breach of this particular section of the Act. Who, subsequently, said what to whom, and when or how they said it, is absolutely irrelevant to this conclusion.

The board of a private limited company is appointed as professional custodian of the interests of that company. It is not the mayor's or the city CEO's job as shareholders to analyse the figures and to abide by the Companies Act.

That is what the independent board members of DCHL were appointed to do on the basis of their supposed expertise - without any further reference to third parties. They were also handsomely paid to do so in this particular instance. This independence is presumably one of the justifications for holding these assets under a private corporate body.

Many might now say "Off with their heads!" It might be more appropriate to say "Out with their wallets!"

A breach of duty under Section 136 is considered to be an offence not against the shareholders, in this case the DCC, but the company, DCHL, itself (Clause 169). It would likely be dealt with as a civil matter involving compensation relating to a portion of the company's presumed loss expressed as an incurred liability by the directors concerned. As action under Section 136 can only be taken by a company, it usually requires a partial or complete change of board personnel to achieve it. One cannot expect people to pursue themselves! As a breach of Section 136 indicates a considerable lack of competence by a board, such a personnel change is probably a prudent course of action, whether or not a subsequent pursuit of individual directors by the new board is envisaged.

The mayor, therefore, seems to be making a reasonable suggestion in his request that several directors depart.

However, the mayor cannot do it all on his own. If this board and its chairman will not depart under their own steam, then Mr Cull will need to equip himself with a formal motion from the council, requesting that they do so.

Such a motion can then be used as a basis for more direct procedures, if even that does not work. I would expect the councillors who represent us to actively back the mayor on this issue - or individually explain to the community the reasons why they will not do so.

• Robert Hamlin is a senior lecturer in the marketing department at the University of Otago.