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No 31 SPRING 2014

A STAPLES RODWAY PUBLICATION

THE LEADERSHIP EDGE What does it take to be an inspirational leader?

LEAKY HOMES Who is left holding the baby?

TEAM SPIRIT Meet Staples Rodway's Tall Fern and V8 Supercars driver

PRIVATE EQUITY The in's and out's of this funding option for your business

TAX CHAT

3 ways to reduce your tax bill

Staples Rodway is an independent member of Baker Tilly International

www.staplesrodway.co.nz www.staplesrodway.co.nz

NUMBERS Spring 2014 • 1


DIRECTORS AUCKLAND

David Searle

(09) 373 1128

HAMILTON

Rosanna Baird

(07) 834 6800

TAURANGA

Chris Downey

(07) 578 2989

HAWKES BAY

Stuart Signal

(06) 878 7004

TARANAKI

Chris Lynch

(06) 757 3155

WELLINGTON

Robert Elms

(04) 472 7219

CHRISTCHURCH

Ross Erskine

(03) 343 0599

DISCLAIMER No liability is assumed by Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this document. It is recommended that you 2consult • NUMBERS your advisor Spring before acting 2014on this information.

No 31 SPRING 2014


IN THIS ISSUE 2

Crank it up for Canteen

2

Staples Rodway Cape Kidnappers Challenge

3

Domain name changes: What you need to know

4

Staples Rodway's team spirit

5

Tax chat

6

The leading edge

8

Changes ahead for self-managed superannuation schemes

9

Investing and self-managed superannuation schemes

10 Understanding private equity in New Zealand 12 The case for external Directors 13 Business efficiency: Common sense thinking 14 Award-winning sharemilkers: Share hard work 16 Fraud: Under the spotlight 18 The paperless office 20 Leaky homes: Who is left holding the baby?


CRANK IT UP FOR CANTEEN I

N LATE AUGUST, THE STAPLES Rodway Auckland office, as part of its sponsorship of CanTeen, took part in the annual The Crank event held at Shed 10 on the Auckland waterfront, in collaboration with Les Mills. The Crank is New Zealand’s only RPM cycling fundraising event, which aims to raise funds for young kiwis living with cancer. This is the second year that Staples Rodway Auckland has participated in this event. This year the team consisted of 12 Staples Rodway Auckland team members cycling alongside a partner from the office, and other participants, for an hour each. Motivation was energetically provided by the Les Mills RPM trainers as well as office bragging rights for those that clocked up the most kilometres after their energy-sapping morning. A well timed all-you-can-eat lunch had been pre-arranged by the Staples Rodway Auckland social club, ensuring that those participating in The Crank were adequately replenished after their energy sapping morning. The Staples Rodway Auckland team was able to raise over $2,000 for CanTeen and The Crank is just one of the many initiatives that Staples Rodway Auckland has participated in since the partnership with CanTeen begun. Director Phil Pavis volunteered at the event and says “our people are very competitive especially our graduates, one in particular who sought to compete at the same time as me to ensure our donors obtained full value. It’s a great event, a great

cause and the most difficult part was deciphering this message from one donor 'A chi vuole, non mancano modi!' - which thanks a bit of Googling we discovered was the Italian version of 'Where there is a will, there is a way!' ”. The money will go towards regional programmes that support, develop and empower local CanTeen members dealing with cancer. Bring on next year!

Gareth Kershaw,Jo Furney and other members of the Staples Rodway team cycled for 6 hours.

STAPLES RODWAY CAPE KIDNAPPERS CHALLENGE I

N OCTOBER 700 PEOPLE TOOK part in the Staples Rodway-sponsored Cape Kidnappers Challenge - a 32km run and walk through stunning scenery in the Hawkes Bay. Staples Rodway Director, Libby O’Sullivan says that “Staples Rodway are excited to be the principal sponsors and organizers of the popular event which

Stuart Signal and Philip Pinckney

2 • NUMBERS Spring 2014

donates all surplus funds back to charity. We are very proud of how involved all our staff are in ensuring this event runs smoothly." Libby went on to say "Encouraging fitness has a huge positive impact on society, and each year we are amazed by the number of people who compete in the event having never done anything like this before”. The event had to be held earlier this year due to tide times. Saturday 4th October was the only weekend that tides would allow the event to be run during the months of October/November/December. While this impacted on numbers slightly, there were still a good bunch of people who turned up to brave the blustery cold conditions. Every year we continue to get comments from competitors as to how stunning the scenery is, and this year was no different. The course was able to go down the river again this year (after a diversion due to heavy rain last year). Competitors love the dramatic views down the river and the opportunity to cool off when going through the many river crossings. Libby was also thrilled to announce that a total of $12,000 was raised for the Hawkes Bay '4 Friends Afterschool Programme' administered by Sport Hawkes Bay. “The funds raised will make a huge difference in getting more individuals involved in sporting activities in our community” says Janette Cooper from Sport Hawkes Bay. Sue McIvor, who was involved in organising the event says “organising an event of this size has its challenges. There is an enormous amount of work behind the scenes to ensure the day runs smoothly and is memorable for all the right reasons. We want to see competitors come back year after year and we do all we can to go the extra mile to ensure this happens”.


DOMAIN NAME CHANGES WHAT YOU NEED TO KNOW There have been some important changes to website domain name registrations that took effect from 30 September 2014 and they may affect your business.

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HERE ARE MANY DOMAIN NAME choices, with the most usual being .co.nz, but now there is another choice: simply .nz. This means that you need to check whether you should register the new shorter name sooner rather than later, because if someone else purchases it from under your nose, it would undoubtedly cause your business unwelcome stress. Here are the key dates to note:

If your domain name was registered before 9am 30 May 2012 You’ll have preferential registration status if it's the only instance of the name. This means you’ll be able to register or reserve the shorter version of it before anyone else. You’ll have a conflict if there are multiple instances of the name (e.g. versions such as .co.nz, .org.nz and .net.nz). This means you’ll have to agree with the other domain holders who will get the shorter version.

If your domain name was registered between 9am on 30 May 2012 and 3pm on 11 February 2014: You’ll have preferential registration status if it's the only instance of the name. This means you’ll be able to register or reserve the shorter version of it before anyone else. If there are multiple instances of the name registered between these dates (eg .co.nz, .org.nz and .net.nz versions), the shorter version of the name became available for general registration from 1pm on 30 September 2014.

If your domain name was registered after 3pm on 11 February 2014: The shorter version of the name became available for general registration and you need to act swiftly. You can find out more about the changes and check your web domain status at www.anyname.nz.


STAPLES RODWAY'S TEAM SPIRIT It’s an often quoted fact that New Zealand is over-represented when it comes to sports stars in our midst and, here at Staples Rodway, we’re no exception. In fact our Hamilton office has not one but two high-profile sportspeople on the team – they’re both aged 26, both are advisers in the Business Advisory Services Team, and both are going places!

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E CAUGHT UP WITH JESS Tuki, a former Silver Fern (netball) and now a Tall Fern (basketball); and Ant Pedersen, a V8 racing car driver who competed at Bathurst in October, to find out how they manage their extremely busy lives. What are your personal and professional goals? JT: I want to maximise the opportunities I have in front of me. I first made the Silver Ferns when I was only 18 and it’s a tough, physical sport that takes its toll. So I had recently decided to take a break and the opportunity with the Tall Ferns came out of the blue. Basketball doesn’t have the same competition structure as netball, so it takes up a lot less time and that has allowed me to pursue my accounting career with Staples Rodway. I’d like to take my CA (Chartered Accountant) exams sometime in the next two-three years.

AP: Without a doubt the biggest hurdle in pursuing a racing career is making it pay. I’m an amateur in a professional environment and I’m racing for three different teams: International Motor Sport for the New Zealand V8 series, Eggleston Motor Sport out of Melbourne for the Australian V8 series, and I’ll be driving for a new Kiwi team called Super Black at Bathurst next weekend. Many people are surprised to learn that 95 per cent of the work is done off the track finding sponsors and budgets. But I’m hungry and driven and this is the life I’ve chosen in order to do some pretty cool things.

How did you come to work at Staples Rodway? JT: I studied a Bachelor of Business Analysis majoring in accounting at Waikato University, but it was through some contacts in the netball community that I was introduced to Staples Rodway, and I started here in November 2011. AP: I started here as an intern during my third and fourth years at University; I was studying a Bachelor of Business Studies with an accounting and marketing major at Massey in Palmerston North. From there I was hired in a graduate role in 2011.

What parallels do you see between work and sport?

AP: I achieved my CA qualification last year and that will certainly provide me with good career opportunities down the track. I’m taking every opportunity at Staples to learn everything I can and maximise my accounting knowledge. But my racing career is probably the priority right now. My goal is to be a full-time professional driver for the next 10 years or so of my life, driving V8 Supercars across New Zealand and Australia.

How do you balance the competing demands of sport and work? JT: I’m really happy with my life and the balance I’ve got. While I’m officially a full-time employee, I do benefit from flexitime. Essentially I work when I can, and the time I need to take off for basketball I’m able to take as unpaid leave. The Staples team is really supportive of my sporting career and if I miss any professional development while I’m away, someone always makes an effort to help me catch up. Don’t get me wrong – I have definitely missed out on some opportunities at work, but I wouldn’t have it any other way. AP: There’s no two ways about it – it’s a busy life and the social life certainly suffers. When I’ve got a race on, Staples Rodway allows me to take the Friday and the Monday off as flexitime. Whether it’s paid leave or unpaid leave, I’ve pretty much used all the options! While it’s always made clear that I still need to get my work done, Staples has shown great understanding of my passion for racing.

What are the particular hurdles you face in achieving your goals? JT: Between working, training and competing there never seems to be enough hours in the day. Netball and basketball are both physically demanding but, boy, do I have an appreciation for working a 9 to 5 day – office life is harder than I thought!

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JT: The obvious one is the team concept. At work each individual has their own KPIs or goals, and together they contribute to the overall team goal; individuals feel like they’re working towards a common goal and don’t want to let the team down by not managing their time well. With sports, there was once a gulf between the senior and junior players, and that could be intimidating. But that’s all changed, it’s now more collegial, just like at work where we sit in pods with a mix of senior and junior staff. AP: It’s all about the team; at work and in car racing the team environment is critical. A team of people with different experience and skills provides the ability to solve problems using trusted systems. For example, to make the car go faster and improve its reliability on the track, there are certain preparation processes that need to be followed.

What inspires you most? JT: It’s the people around me – I’m inspired by their achievements. My Dad played sport and I get my competitive spirit from him. From a work perspective there are plenty of role models but, perhaps surprisingly, it’s some of the younger staff who I see achieving great things that I often find most inspiring. AP: For me it’s a personal thing. I have high levels of personal drive and want to be the best person I can be. There’s definitely a passion for speed in the family, and I’m carrying that on in the achievement of my goals.


TAX CHAT

ENTERTAINMENT

Entertainment expenditure is commonly assumed to be an area that does not require much consideration. Expenditure is often simply coded as being 50% non-deductible for income tax purposes. In our experience however, it is not as straight forward as it might first appear. Various items of entertainment expenditure can be 100% deductible, and others might instead be subject to fringe benefit tax. Accordingly, it may be possible to claim greater deductions, or have a tax liability which you did not know existed. It is also required to include an output tax adjustment for non-deductible entertainment in the GST return covering the earlier of the date the income tax return is filed, or the date on which the income tax return is due. This is a nondeductible expense for income tax purposes. However there is an opportunity whereby this adjustment may not be required. Whilst this is an item that is not longer disclosed on the IR10, Inland Revenue may still question this figure in a review or audit of the company, especially if it is a larger number. We therefore recommend that a review is undertaken, ideally prior to commencing the income tax return, to ensure that the maximum deduction is being claimed for tax purposes and to ensure that there are no undisclosed tax liabilities.

EMPLOYEE ALLOWANCES

Article by Phil Hampson STAPLES RODWAY AUCKLAND philip.hampson@staplesrodway.com

We take a look at three tax issues that are often overlooked and could result in tax savings.

Employee allowances are generally tax free to the employee. Particularly, reimbursements for business expenditure, meal payments for overtime work and cash allowances for travel. Effective 1 April 2015, new rules in the Income Tax Act 2007 clarify when an allowance is tax free. The new rules cover meal allowances in certain circumstances and include (broadly speaking) when an employee is required to work away from home for up to three months. The rules also clarify when the provision of accommodation is tax free. The time period when this allowance is tax free depends on the circumstances. Special rules also apply to the Canterbury rebuild. The new rules regarding clothing allowances clarify when uniforms (and in some circumstances plain clothes allowances) are tax free to the employee. The clothing allowance rules appear to align more with the FBT regime.

FIXED ASSETS

Fixed asset registers are often an overlooked area when the tax return is being prepared, especially if tax depreciation rates are used for accounting. In our experience spending some time reviewing the rates used can lead to increased depreciation claims in the tax return and real cash savings. This is especially true if the rates are simply rolled forward year to year. An error several years ago in an asset category that is regularly added to, for example computers, can have a multiplying effect which can quickly add up. Where a separate tax and accounting fixed asset register is maintained any large differences between tax and accounting depreciation will be highlighted on the IR10 disclosures. Inland Revenue may commence a risk review based on this so you will need to be sure that your tax fixed asset register can stand up to scrutiny. The way to deal with the above issues is to review your fixed asset register and ensure that the correct treatment has been applied. This process can be undertaken at any time but ideally would be a pre-year end exercise, especially if the same register is used for tax and accounting. For further guidance and information on any of the above, please contact your local Staples Rodway office.

www.staplesrodway.co.nz

NUMBERS Spring 2014 • 5


THE LEADING EDGE As we have not long ago celebrated the Sir Peter Blake Leadership Week, it is timely to have a closer look at the concept of leadership and what makes a good leader. At a surface level, most of us ‘get’ the importance of leadership. We want to be a good leader ourselves, we want to recruit great leaders and we should definitely know how to ‘grow’ a great leader. However, in reality, many organisations are ‘winging it’. They don’t really know what makes a good leader.

Article by Andrea Stevenson STAPLES RODWAY HAWKES BAY astevenson@stapleshb.co.nz

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HY IS LEADERSHIP SO IMPORTANT? Firstly, it is the single most important factor determining success in business. Leadership creates engagement and higher employee engagement leads to better organisational performance. We all know lower engagement leads to worse organisational performance. Leadership is more than just an efficient way of co-ordinating and directing people and resources. After all, it is possible to direct and co-ordinate without leaders. At a functional level the essential task of a leader is providing direction, alignment with an organisation’s goals and commitment to an organisation and its staff. But it is more than this. Organisational Psychologist Dr Robert Hogan has been involved in on-going research into high performance traits of leaders. His view is that leadership should be defined as the ability to build and maintain a team that can outperform the competition. Leadership is a resource and a good leader has the ability to build a high performing team.

WHAT LEADERSHIP IS NOT A traditional pitfall is considering the succession of organisational leadership positions arises from promoting people solely based on a history of strong performance in their specialist area. However, being technically good does not translate to leadership skills. To develop these technical specialists into leadership positions requires input - great mentors and role models and opportunities for them to develop both in self-awareness and interpersonal skills. This is not simply solved by a training course, but instead by exposure to those skills and positive role models through the involvement in specific projects.

THE TOP SIX WORST BEHAVIOURS In Hogan’s research, he identifies the top six worst behaviours identified in leaders: ƒƒ Arrogance ƒƒ Manipulation ƒƒ Emotional volatility ƒƒ Miscommunication ƒƒ Passive aggressiveness ƒƒ Distrust of others

WHAT MAKES A GOOD LEADER? Integrity is a core trait that has been identified as a vital ingredient in a good leader. Not all examples in history fit with this, but it is what most people cite as something they look for. Along with this, people like to know that their leader is competent in what they do and have good judgement and wisdom. Aside from these fundamentals however, other core traits have been identified. According to Nigel Nicholson of the London Business School, a good leader is Adaptive to a changing world – the world both inside and outside the group. As part of this, he has identified a ‘Leadership Formula’: to be the right person,

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at the right place and time, doing the right thing. This sometimes requires transforming your organisation and repositioning it (or, as Steve Jobs did, changing the market it sits in). However, at the same time, you need to be able to “surf the waves of change” - be adaptive, be versatile and adjust behaviour to meet the changing demands of the times. Effectiveness means continually getting the balance between shaping and adapting right. Statistics show that more businesses fail after a recession than during it which is potentially indicative of a failure to adapt. Hence the importance of not only resiliency in a leader, but also the willingness and skill to embrace and lead innovation. Effective leaders are also Inquisitive. A good leader knows how to ask smart questions and to enlist others and be resourceful in the search for solutions. You need to be talking to people who aren’t usually consulted and not relying on the nearest and most powerful around you. This may require a level of courage where the questions and the answers are not always easy. It suggests being wary of falling into familiar patterns and ways of seeing, but to keep refreshing your perspective. One of the most critical core requirements for any effective leader is Strategic Self-Awareness. This requires leaders taking responsibility for themselves, their personal development and their own improvement. Leaders need to understand their own motives, shortcomings, potential ‘derailers’ and blind spot behaviours, and understand the impact of their behaviour and actions on others. A good leader will have people around them who are different to them to provide honest feedback and challenge them constructively. A blind spot in leadership is in being too isolated and independent. One of my favourite quotes is from Henry David Thoreau “I know of no more encouraging fact than the unquestionable ability of man to elevate his life by conscious endeavour”. People can consciously change themselves. Nicholson sums this up as strategies for “seeing, being and doing”. Seeing comes first. It is being inquisitive with respect to ones self, not least by seeking out feedback on the impact of your own behaviour and strategies. There are tools to help this process – personality profiling, 360 degree feedback and executive coaching. In line with the above, Rob Goffee and Gareth Jones in their book “Why Should Anyone Be Led by You” go on to say that in the process, to be a great leader, you must be your authentic self. Copy-cat leadership will not result in a great leader. Great leadership requires being yourself, but with skill. This could be viewed as the integrity component. In the process you need to know who you are (the self-awareness bit), where the organisation needs to go (vision) and how to convince followers to take it there (impact). Rob Fyfe, former Air NZ head, agrees, saying "It's too easy for us to slip into these stereotypical mind sets of what an executive or CEO should be rather than actually trust in who you are and be genuine and authentic as a person." Another concept of a good leader is being a Narrative leader, a concept that we see growing in the leadership domain. This is more than just communicating and building relationships, although communication is absolutely key. The philosophy behind this is to share our story, the “Who I am” and “Why I’m here”. This is more than reciting your CV. It is communicating critical events that shaped you, sharing your value proposition with your people and telling them about you as their leader. According to Hogan, if your values, amongst other things, are aligned with your team’s values then you will see a greater level of engagement from your followers. In line with the above, leaders need to show people what the future can look like – what most people call vision. They create a culture that embodies positive values in all they say and do; they are empowering and see their role as serving the organisation as a community and liberating the talents of its people rather than themselves.

NUMBERS Spring 2014 • 7


CHANGES AHEAD

FOR SELF-MANAGED SUPERANNUATION Article by Tracey Cross DLA PHILLIPS FOX tracey.cross@dlapf.com

Do you have your own self-managed superannuation scheme? If so, you need to be aware that the Financial Markets Conduct Act 2013 (the Act), which comes into effect this December, will make significant changes to your scheme

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HE ACT GOVERNS FINANCIAL PRODUCTS, how they are promoted and sold, and the on-going responsibilities of those who offer, deal and trade them. The Act will replace existing securities legislation, including the Superannuation Schemes Act 1989, which currently governs your scheme. The Act's main purpose is to promote the confident and informed participation by businesses, investors and consumers in New Zealand's financial markets, and to promote and facilitate the development of fair, efficient and transparent markets. It will do this by a new regime of licensing, supervision, and enhanced governance and disclosure requirements. Of most relevance to you, the Act contains more robust rules for superannuation schemes. Up until now New Zealand law has taken a more passive approach than overseas equivalents to enforcing policy around superannuation schemes' retirement purposes and withdrawals. From a public policy perspective, our Government has remained neutral because there have been few or no incentives in New Zealand to divert funds to retirement schemes for tax reduction purposes. New Zealand is however out of step with rules applying to superannuation schemes in other jurisdictions and this is going to change. In Australia, self-managed superannuation schemes represent the largest and fastest growing sector of the Australian superannuation system mainly due to the flexibility of investments, tax breaks and family estate planning opportunities. As at June 2013 our Financial Markets Authority (FMA) recorded there were 238 self-managed superannuation schemes in New Zealand with over $174 million managed by such schemes. While the number of self-managed superannuation schemes in New Zealand is currently small, the interest of New Zealanders in such schemes may grow, particularly if they are looking in the future to self manage balances that have accumulated in a KiwiSaver Scheme. Currently in New Zealand superannuation schemes are required to be 'principally for the purpose of retirement', which enables other ancillary benefits to be provided under the scheme such as total and permanent disability or ceasing employment benefits. However under the Act the definition of superannuation scheme will be reserved for those schemes that meet a 'sole retirement purpose' test. Such schemes will also require a licensed supervisor and manager, compliant governing documents and pre-

scribed disclosure, with new duties and governance obligations applicable. In recognition of some of our existing superannuation models, which will not fit the sole purpose retirement test (including workplace savings schemes and self-managed superannuation schemes); some concessions have been made under the Act. Schedule 3 of the Act provides for the statutory recognition of single person self-managed superannuation schemes. In order to continue your current self-managed superannuation scheme past December 2016 (as there is a two year transition period to comply with the new regime) you will need to apply to FMA to register your scheme as a "Schedule 3 Scheme". To be approved as a Schedule 3 Scheme your scheme must: ƒƒ meet certain eligibility requirements ƒƒ have only one scheme participant, and ƒƒ meet the sole retirement purpose test. The current draft of regulations to be made under the Act also contains reporting obligations and requirements for the trustees of Schedule 3 Schemes to keep proper accounting records and prepare financial statements. Prohibitions on transactions giving related party benefits also apply. There are benefits in acting quickly! If you register a Schedule 3 Scheme prior to 31 March 2015 the financial statements of your scheme will not need to be audited (a substantial cost saving), as unlike the current Superannuation Schemes legislation audited financial statements are not required for a Schedule 3 Scheme. If you have a self-managed superannuation scheme and would like to discuss the impact of the Act and the changes you need to make, please contact Tracey Cross of DLA Phillips Fox on +64 9 916 3773.


INVESTING AND SELF-MANAGED SUPERANNUATION SCHEMES Article by Wayne Powell STAPLES RODWAY ASSET MANAGEMENT

SCHEMES

wayne.powell@staplesrodway.com

Making any changes to the structure of your superannuation scheme is also a good opportunity to review your arrangements as a whole, including the scheme's investments.

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NE OF THE BIG CHALLENGES with any superannuation scheme is the timeframe over which the investment needs to be managed. It is not unreasonable to expect a selfmanaged superannuation scheme to have a timeframe of 45-50 years. Over such a long period the circumstances of the beneficiary will undoubtedly change and the structure of the superannuation fund will need to match those changed circumstances. One area where change in beneficiary circumstances will be of significant impact is in the asset allocation of the superannuation scheme. Broadly speaking the asset allocation is the division of money in the fund to income assets and growth assets. The asset allocation provides diversification for the fund and also controls the risk/return profile. Asset class returns are not fluid by nature and as shown in the graph below asset allocation as a whole is becoming more and more challenging.

PERFORMANCE OF US BALANCED FUNDS Annualised Return 80's to 90's

16%

RETURN

14%

Annualised Return Post 90's

12% 10% 8% 6% 4% 2% 0% 100% BONDS

80% B/ 20% E

Bonds: US Tresury Index 1980 - 2014 Equities: S&P500 Equity Index 1980 - 2014 Source: Bloomberg 2014, Nikko Asset Management

60% B/ 40% E

40% B/ 60% E

20% B/ 80% E

100% EQUITY

ASSET MIX

A commonly held belief is higher risk equals higher returns. In actual fact, higher potential risk can mean just that, higher actual risk and loss of capital. It is important to take a broader view of risk and also incorporate valuation into the equation. Even with a 45 year timeframe there is little benefit to be gained by investing heavily in growth assets, for example, if growth assets are expensive. Anyone who has been involved with any type of trading will tell you that the profit is made when the item is purchased not when it is sold. In other words, if you pay too much for an item your changes of achieving your desired profit are severely constrained. The secret to successful investing is to avoid big losses in the first place. A 20% loss in a year needs a 25% gain in the following year just to get back to the original capital value. While the thought of a self-managed superannuation scheme may be appealing, there are many pitfalls which professional advice can help you avoid. The team at Staples Rodway Asset Management are well qualified, experienced and available to assist you to achieve your financial goals. Wayne Powell would be happy to assist you in this process and can be contacted on 09 373 1121.

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UNDERSTANDING

PRIVATE INEQUITY NEW ZEALAND Article by Tracy Hickman STAPLES RODWAY AUCKLAND tracy.hickman@staplesrodway.com


Private Equity (PE) in New Zealand has increased significantly in activity recently, with the 2013 New Zealand Private Equity and Venture Capital Monitor reporting NZ$456.2m of investments spread across 82 deals. If you are looking for a new source of capital, is PE funding an option for your business? Tracy Hickman from our Corporate Advisory team explains how it works.

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E FIRMS ARE FUND MANAGERS that generally invest in established companies that are considered to have high growth potential. In New Zealand, the investment is part of a long term process, with the aim of growing the business and increasing its value. Transaction sizes can vary from $1 million for the smaller PE firms, to $25 million plus.

WHICH INDUSTRIES ARE SOUGHT AFTER BY PE FIRMS? PE firms are keen to be involved in any business that has a strong growth potential. This includes, but is not limited to, businesses in the food and beverage, healthcare, aged card, alternative energy, early childhood and infrastructure sectors.

WHY CONSIDER PE INVESTMENT? PE investment brings both capital and capability to New Zealand businesses. When PE firms take an equity stake in a business, they also help business owners and senior management with mentoring advice on strategy, financing and growth.

HOW LONG DOES IT TAKE? If you are interested in finding a PE firm to partner your business, bear in mind that the investment process can take several years to allow the PE firm to understand your business and build a level of trust before investing.

WHAT DOES THE PROCESS INVOLVE? After initial discussions getting to know you and your business, the process involves drafting an initial term sheet to outline the key components of the offer. Once the general deal is agreed, a Shareholders’ Agreement and Sale and Purchase Agreement are drafted to fine tune the details. Also during this period, around four to six weeks of legal and financial due diligence is undertaken to identify how the PE firm can add value to your business, and to check that what you say is happening is really happening!

HOW CAN I PREPARE MY BUSINESS? Businesses can prepare for PE investment by issuing clean and robust audited financial statements, and monthly management accounts. It is also helpful to

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build a second layer of management for succession and use external advisors with appropriate skill-sets for the transaction.

HOW IS PE FUNDING GOING TO CHANGE MY BUSINESS? The key changes that you are likely to experience post PE investment include the implementation of structured financial reporting and holding regular board meetings. It is important to note that you will not necessarily experience a loss of control, as most New Zealand PE firms view the arrangement as a long term partnership rather than a takeover.

HOW IS THE PE FIRM GOING TO EXIT MY BUSINESS? Common exit strategies include an Initial Public Offering (IPO) which involves listing the business on a stock exchange, organising a trade sale to a strategic purchaser or selling their stake to another PE firm. Some PE firms look to maintain the investment and derive long term income for the PE fund. Another approach is that the stake in the business may be sold back to the owner. It is important for both parties to discuss the planned exit strategy early in the process, particularly with regard to timeframes.

WHEN DOES PE FUNDING GO WRONG? There are a few problem areas which can derail the PE funding process. One common issue is when a business owner changes their mind part-way through the process. This may be triggered by an external event, or it may simply be that when the transaction is imminent, the implications of sharing control of your business form a barrier to proceeding. Another problem can arise where not enough honesty or transparency has been employed upfront, so baring all during the due diligence stage can be key to a successful transaction. At Staples Rodway, we have a number of contacts in the PE Market and may be able to introduce you to potential investors. If you are interested in finding out more about PE funding, please feel free to contact Tracy Hickman on 09 373 1133 or tracy.hickman@staplesrodway.com, or talk to your usual advisor.

NUMBERS Spring 2014 • 11


THE CASE FOR EXTERNAL DIRECTORS Article by Colin Theyers STAPLES RODWAY AUCKLAND colin.theyers@staplesrodway.com

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USINESS IN NEW ZEALAND REMAINS a challenging environment for many companies. Despite the ‘rock star’ label that some commentators have attributed to our economy, this is a term usually used only when comparing ourselves to other countries. Companies still need to be very focused to progress and take advantage of the opportunities the economy presents. Strong leadership is a vital part of companies exploiting their opportunities, being relevant and in touch with their markets, together with understanding product cycles, competitor activities and emerging trends. Given the lack of depth in our economy, conditions can change quickly and leadership, a well though through strategy, and the ability to execute that strategy in a timely manner is the difference for many companies between success and failure. The reality is that for many companies the leadership team are also part owners and Directors. Many companies are family owned with second or third generation management that represent wider family ownership interests. These combinations of leadership and ownership structures are part of the reason companies can thrive over time to build their success. However, they can create issues, including a lack of balance and an unwillingness to change behaviours and adapt to obtain a superior outcome for stakeholders. The inclusion of external non-executive Directors can significantly assist in balancing how these challenges and opportunities are best managed. Good governance is supportive, demanding, and should assist the sustainable and prudent development of an enterprise. Boards should have a culture that celebrates debate, candour and openness between executive and non-executive directors. Issues should be welcomed as an opportunity to test entrenched thinking and be dealt with objectively, rather than an opportunity to raise personal matters or grievances. Strategy development and risk management generally benefit from an external perspective that challenges established internal thinking. At times we all run the risk of getting too close to issues to be able to examine them with a clear eye. Having external directors provides a useful sounding board to discuss opportunities and reach improved decisions with the benefit of new experiences drawn from the wider business environment and more years of experience. External directors must be more than attendees at board meetings to make up the number. Their role should create balance, perspective and support better outcomes for all stakeholders. We recommend the use of external directors as part of the growth strategy of medium to larger businesses. Well-chosen they offer relevant external experience, a clearer perspective and a wider skill set around the Board table. Colin Theyers is a Staples Rodway Director, who has an advisory and governance focused practice and was recently made a Fellow of the Institute of Directors.

12 • NUMBERS Spring 2014


BUSINESS EFFICIENCY

COMMON SENSE THINKING B

USINESS EFFICIENCY SOUNDS BORING WHEN compared to innovation, growth, brand strategy or human capital, but it may be the ingredient that actually allows a business to thrive in tough times. Consider the following. An efficient business will: ƒƒ Make better margins; ƒƒ Be more resilient to price competition; ƒƒ Have more resources to spend on innovation, growth, brand, and people; ƒƒ Have greater flexibility and choice; ƒƒ Have the support of key stakeholders such as financiers and customers; and will, ƒƒ Have built capital value because it has know-how that everyone else wants. Don’t make the mistake of thinking business efficiency equals cost cutting. It doesn’t. The two notions are recognisably different. A business that pursues efficiency will already have cut away unnecessary cost layers and may even spend more to achieve its goal. Efficient spending is more than likely constrained but it has as its purpose the building of long term competitiveness. A cost cutter, on the other hand, may sacrifice longer term relationships or investment to achieve short term objectives. This can be more than appropriate where a business is poised on the brink of failure. But if the business has the capacity to grow and possesses a long term vision, then cost cutting for the sake of it can be very damaging. Achieving efficiency in times of volatility can be difficult. The pricing of a productive process will inevitably have assumptions built into it and those assumptions will be challenged by any dynamic business environment. This could be such things as threats to volumes, supply chains, or exchange rates. However, an efficient business model will have identified and dealt with risks that could undermine it. For example, volume risks can be dealt with through customer contracting terms or through diverse customer and market strategies. Making costs as variable as possible will also help. This could come from flexibility in the workplace, outsourcing of parts of the productive process, or limiting the fixed overhead structure of the business. But the key to making a business efficient is information. Information that reliably tells you where you are today and what progress is being made along the way to achieving the goal. This will be information that is both financially based and quantitative data coming from the productive process. Reporting this information with appropriate regularity and speed can be critical to shortening the overall time taken to become efficient. Business intelligence tools are readily and economically available to assist with this. Article courtesy of Pitcher Partners, an affiliated firm of Staples Rodway located in Australia

NUMBERS Spring 2014 • 13


AWARD-WINNING SHAREMILKERS:

SHARE HARD WORK Article by Abbie Tebbutt STAPLES RODWAY TARANAKI Abbie.Tebbutt@staplestaranaki.co.nz


We’ve all heard the saying ‘when one door closes, another one opens’. Taranaki dairy farmers Greg and Amanda Bland experienced exactly that on their journey from novice farmers to industry award winners.

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ABINETMAKER GREG AND STAPLES RODWAY Taranaki Accounting Technician Amanda decided early on in their married life that, in order to secure enough equity for their retirement, there needed to be some big changes made. Cabinetmaker Greg and accounting technician Amanda (who used to work for Staples Rodway) decided early on in their married life that, in order to secure enough equity for their retirement, there needed to be some big changes made. They’d always believed there was a future in farming so, seven years ago, the decision was made to become variable-order sharemilkers, as the first step towards one day owning their own farm (sharemilkers work on someone else’s dairy farm for a share of the profits, often owning all or part of the herd of cows). The couple spent the first few years optimising the farm by filling in creeks and drains, improving the pasture quality, and changing the cows from Friesian to Friesian Cross. They also refrained from employing staff and instead opted to single-handedly run and manage the farm themselves. Though happy with their early success, they realised they needed to make further progress so applied for a 50:50 sharemilking position on a farm close by. When they missed out on the job, they quickly realised they needed to take a different approach if they were to one day achieve their goal of farm ownership. “The industry is changing, and climbing the ladder from farm worker to farm owner is not as simple and straight forward as it used to be,” says Greg. “The number of sharemilking opportunities have rapidly reduced over the years. 50:50 roles are scarce and competitive; you need something extra that really sets you apart from other applicants.” Back in 2000, Greg’s brother had won the low order sharemilker section of the Dairy Industry Awards, and had since built his career on the back of this. “We thought, if it worked for him, it could work for us too,” Greg says. “Amanda and I were hesitant at first to enter the awards, but then realised it was a good opportunity to build our profile in the industry and step out of our comfort zone. We also saw it as a good chance to network with some of the stand-out leaders in the dairy industry,” he says.

Award-winning Greg and Amanda Bland with their family.

In the preliminary judging round, the couple focussed on communicating their strengths and making the most of their allocated time. “We took the judges over the farm and Greg explained the pasture management, herd management, farm development work and health and safety. I explained the financials,” says Amanda. In the second round of judging, the Blands focussed more on scientific analysis and spent time picking the brains of agri-industry reps, while trolling through online resources to learn best practice strategies inside out. As it turns out, their hands on farming experience, mixed with accounting, taxation and human resource management skills, were a successful combination. As a result, at the 2014 Taranaki Dairy Industry Awards the couple won the Westpac Business Performance Award and the Triplejump Risk Management award, as well as receiving very positive feedback from the judges for Pasture Management and Recording and Productivity. Amanda believes it was her budgeting, business and analysis skills picked up at her role as an accounting technician at Staples Rodway, as well as the support and advice from some of New Zealand’s leading rural accounting specialists, which gave her and Greg a competitive advantage when it came down to the business performance component of the awards. Participating in the awards has sharpened Amanda and Greg’s focus on their goals. The awards have opened doors to industry leaders they otherwise would have never met and have helped to build their reputation. Greg and Amanda say their immediate plan is to secure a 50:50 sharemilking position, preferably between 400 and 600 cows. “If we can secure a decent size job now, we firmly believe we can achieve farm ownership within the next five years.” Staples Rodway Taranaki is a proud supporter of the Dairy Industry Awards and sponsors the Staples Rodway Chartered Accountants Leadership Merit Award.


FRAUD

UNDER THE SPOTLIGHT Article by Jackie Russell-Green NATIONAL TECHNICAL MANAGER jackie.russell-green@staplesrodway.com

Fraud – it’s one of those things that we all like to think only happens to other people’s businesses, but not to ours. Sadly, too many businesses find out the hard way that fraud is something that can happen to any business. We examine the steps that businesses can take to reduce their fraud risk and the signs that may indicate that fraud is occurring.

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RAUD IS ONE OF THOSE things that business owners and managers tend not to think about until they are forced to by the actions of an employee. Catching someone defrauding you, and then dealing with that fraud, can be one of the most unpleasant and stressful parts of business ownership. Although fraud risk can never be completely eliminated, putting in place some procedures to make it harder to commit fraud will help business owners to reduce their fraud risk. Similarly, understanding signs that may suggest that fraud is occurring may make it easier to detect fraud.

UNDERSTANDING FRAUD It’s often hard to fathom why someone would commit fraud. People who deal with fraud on a professional basis often talk about the fraud triangle, which describes the three factors that are present in fraud: 1. M  otive (or pressure) is a person’s perceived need to commit fraud (for example, a person may feel that they need more money to meet their existing financial commitments, or to afford something that they want). 2. R ationalisation is the mind-set that allows a person to intentionally commit fraud and justify their dishonest actions (for example, someone might rationalise their behaviour if they believe that they are underpaid for the work that they do, or believe that they’re not stealing as they intend to return the money when they are able to). 3. O  pportunity is the situation that enables fraud to occur (often when internal controls are weak or non-existent).

THE FRAUD TRIANGLE Opportunity

Rationalisation

Motive

As a business owner, there’s very little that you can do about motive, as that tends to be specific to the person committing the fraud. Similarly, although you can reduce factors that people may use to rationalise fraud, by ensuring that staff are paid at market rates for their work and treated fairly, rationalisation is still a factor that is at least partially dependent on the thought processes of the person committing the fraud. However, there are a number of things that businesses can do to reduce opportunities to commit fraud, and it in that area that fraud prevention measures should be focussed.

REDUCING OPPORTUNITIES FOR FRAUD TO BE COMMITTED Fraud prevention isn’t something that can be tacked onto your business as an after-thought. The best fraud prevention strategy is one that’s woven into the fabric of your business and that includes: ƒƒ A thorough process for identifying where fraud risk might arise. Some areas where fraud commonly arises include:


ƒƒ C ASH AND BANK ACCOUNTS – frauds have arisen from cash being stolen, cash sales not being recorded and unauthorised payments being made from bank accounts ƒƒ INVENTORY – frauds have arisen by inventory being stolen from storage (“shrinkage”) and inventory being stolen from customers (short delivered orders) ƒƒ COMPANY ASSETS – frauds have arisen from assets being stolen, or being used by employees for private purposes, including private commercial purposes ƒƒ DATA – frauds have occurred where fake employees and suppliers have been established, employees who have left the business have continued to be paid and supplier bank account details have been changed so that payments go to an employee ƒƒ CUSTOMERS – frauds have arisen where clients have been offered cheaper services by staff who undertake the work for themselves (sometimes using the employer’s equipment) ƒƒ Putting in place policies and procedures to reduce opportunities for fraud to arise. Such policies and procedures are often based on the following principles: ƒƒ Maintaining an adequate separation of duties, which means having more than one employee involved in key tasks (for example, one employee might maintain supplier master data, such as bank account details, while another employee ensures that all invoices are authorised for payment and a third makes electronic payments to suppliers) – having one employee undertaking all stages of a transaction increases their opportunity to commit fraud, as there is no one checking their work ƒƒ Requiring transactions to be properly authorised (for example, requiring all orders to be made from authorised suppliers and to have an order number) ƒƒ Ensuring that assets are adequately secured (for example, limiting the number of staff who have keys to work premises and access to assets such as inventory) ƒƒ Monitoring and checking data and documentation (double checking things on a random basis can make it harder to commit fraud, as it becomes much more difficult to guarantee that a fraud won’t be detected) ƒƒ Creating a culture where compliance with company policies and procedures is expected. This means that all staff, including senior staff and owners, must follow all company policies and procedures. Staff who observe others breaking the rules are much more likely to break those rules themselves.

THINGS YOU CAN DO IMMEDIATELY Some easy fraud prevention measures that you can put in place right now include: ƒƒ Clearly and regularly communicating to all staff that you have a zero tolerance policy in relation to fraud ƒƒ Limiting the number of staff who have access to online banking login details and chequebooks (if you still use them) and changing online banking passwords regularly and as soon as an employee who had access to them leaves ƒƒ Reconciling bank accounts to accounting records at least monthly, to ensure that all payments from bank accounts are legitimate ƒƒ Ensuring that all purchases are authorised by someone other than the person who will be making the payment and that only properly authorised payments are made ƒƒ Requiring a new supplier approval process that includes checking to ensure that supplier directors aren’t also employees ƒƒ Regularly reviewing payments to suppliers to ensure that there aren’t any unexplained increases ƒƒ Regularly checking bank accounts to which payments are made to ensure that there aren’t any double-ups (such as an employee and a supplier having the same bank account number) ƒƒ Only allowing changes to supplier master data (such as bank account numbers) to be made following a written request by the supplier and limiting the number of people who can change master data

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ƒƒ U  ndertaking regular stock takes (these don’t need to be full stock takes – you could focus on just one stock line). You should also consider whether it is feasible to establish an anonymous whistle blower line for people to report fraud. Such lines are often used to report fraud that otherwise might not be detected until considerably later, by which time the fraud would likely have become considerably greater.

SPOTTING FRAUD RED FLAGS As well as putting in place procedures to reduce the likelihood of fraud, you should be on the lookout for indicators that fraud may be occurring. Many people who commit fraud manage to do so without making any changes to their behaviour or leaving any tell-tale signs. However, there are some fraud red flags that you should keep in mind, so that you can act appropriately if you see them: ƒƒ An employee who rarely or never takes holidays, only takes holidays when everyone else is also away, regularly works outside normal work hours when it isn’t necessary to do so or refuses a promotion (as this behaviour may suggest that the employee is trying to make sure that no one else can scrutinise their work, which may be because they don’t want a fraud to be detected) ƒƒ An employee whose lifestyle doesn’t seem possible on their wages/salary ƒƒ An employee whose expense claims are significantly more than those in a similar role, or show a spike when there is no correlating spike in activity ƒƒ Unexplained inventory shrinkage or customer reports of short delivered orders ƒƒ Payments made to unknown suppliers or employees ƒƒ Suppliers who insist on dealing with one particular member of staff, as this may suggest that there is an arrangement between them ƒƒ When work is quoted for, an employee with a low or reduced quotes to sales conversion rate, as this may indicate that the employee is under-cutting the business and undertaking the work privately ƒƒ Company procedures not being followed. As discussed above, putting in place appropriate company policies and procedures is one of the key ways of reducing fraud risk. If an employee is not following existing procedures it may indicate that they are committing fraud (and at the very least it suggests that existing procedures are not sufficient, as they can be circumvented). Don’t forget though, although these are indicators that fraud might be occurring, they are not definitive – in most cases there will be a perfectly innocent explanation for what you’ve noticed.

DEALING WITH SOMEONE WHO HAS COMMITTED FRAUD If you find that an employee has committed fraud, or even suspect that they have, there’s a huge temptation to fire them on the spot and march them off the premises. You should not act on that temptation! If you do suspect that an employee has defrauded you, you should conduct a thorough investigation, so that you can determine whether fraud has occurred and the extent of the fraud. We undertake numerous fraud investigations every year and frequently discover that the true extent of the fraud is considerably greater than initially thought. When dealing with suspected employee fraud you should also follow your own employment policies and procedures for dealing with suspected employee misconduct and follow the requirements of employment law. You should also seriously consider seeking professional advice, as failing to follow an appropriate process could result in the employee having grounds for action against you under employment law. Fraud risk can never be completely eliminated, but it can be more effectively managed by putting in place simple procedures to reduce opportunities for fraud to occur and being aware of signs that may indicate that fraud is occurring. We can undertake a fraud health check for you – have a chat to your usual Staples Rodway contact if you’d like more details.

NUMBERS Spring 2014 • 17


THE PAPERLESS OFFICE Article by Matthew Shallcrass STAPLES RODWAY CHRISTCHURCH mshallcrass@srchch.co.nz

In recent years many New Zealand organisations have updated their document management system from paper to electronic storage. Staples Rodway Christchurch recently implemented an electronic document management system to reap the rewards of this cost effective and secure technology.

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TORING ELECTRONIC COPIES SIGNIFICANTLY REDUCES the amount of information an organisation holds in a physical form. There are many potential benefits associated with electronic storage provided care is taken to ensure the project is successfully implemented. Generally, electronic document management systems use scanners to make electronic copies of every document a business wishes to retain. This should run in tandem with software to directly capture and file documents that are in electronic formats to begin with, such as email and pdfs. There is a wide variety of document management software solutions available to suit the needs of every organisation. Benefits in updating to an electronic document management system include: ƒƒ Ability to Access Records at Any Time From the moment a document is scanned, it becomes accessible from any computer by an authorised user. This makes the system more efficient and convenient for users. ƒƒ Cost and Time Savings Electronic storage has significant cost benefits, as it saves leasing of office space for filing cabinets and other shelving required for physical storage. It also eliminates the need for archived records to be stored offsite, further reducing storage and retrieval costs and reducing time in accessing files. ƒƒ Enhanced Security and Privacy Every electronic document contains its own audit trial which records all changes and access logs. There is the potential for security settings to allow only certain staff members to view certain documentation. ƒƒ Business Continuity Electronic storage can enable an organisation to recover swiftly from any unforeseen circumstances, such as serious incidents or disasters. ƒƒ Less Environmental Impact Electronic storage can reduce the number of documents printed, reducing the amount of paper used by an organisation. While there may be benefits in introducing an electronic document management system, it is important to carefully manage the design, planning and implementation processes. Your organisation should consider the following issues: ƒƒ Timing Avoid updating the system during busy periods to reduce the level of disruption. It is more efficient that the majority of staff learn the system at the same time. ƒƒ Storage Whether your data is stored locally or in the cloud (online) it should be regularly backed up, such as three times per day. Electronic storage

18 • NUMBERS Spring 2014

should be able to withstand potential hazards such as fire and water. If considering using cloud based storage you should ascertain exactly where your data is being stored, as some online storage companies sub contract to third parties, which could affect data access in the event of something happening to the third party. ƒƒ Design and Documentation Review every aspect of the existing paper document management system so that you can develop an electronic equivalent. Clearly document these procedures for consistency across the organisation. ƒƒ Training Provide staff training that clearly explains and demonstrates the software’s functionality. You may need to complete this over a number of sessions. Tailor the training to each department so that every staff member understands how to perform their role within the new system. ƒƒ Review and Feedback Allow sufficient time after the “go live” date to review the performance of the new system. It is important to document staff feedback and check documents are being stored correctly. Put in place a process for recording any issues or suggestions from staff to resolve matters in a timely manner. Provide additional training and support as required. The introduction of an electronic document management system by the Christchurch office has resulted in a number of positive outcomes. Firstly the removal of the physical Lundia filing system that previously occupied a significant portion of floor space in the office. Secondly while the headcount of staff has remained the same a number of roles have changed in order to accommodate the electronic system. For example, previously the Office Junior would file each document by hand, but now scans them and files them through their computer. Finally, having documents stored electronically in a single central location has enabled staff to access information more efficiently, while also eliminating the potential for files to be misplaced. While the implementation of any new system is not without risk, careful design, planning and review will help ensure the project’s success, as achieved by Staples Rodway Christchurch. The above is intended as general advice only and should not be relied upon. Please contact your usual advisor or Staples Rodway if you have any specific questions about the topics discussed here.


LEAKY HOMES WHO IS LEFT HOLDING THE BABY? Article by Spencer Smith STAPLES RODWAY CHRISTCHURCH ssmith@srchch.co.nz


A major issue arising during the leaky homes saga is who should share in the liability arising from a leaky home. Should liability be joint and several, or proportionate? These and other questions have been recently considered by the Law Commission in its report completed in June 2014. This article explains the Commission’s conclusions, and what they might mean for your business.

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IABILITY ISSUES ARE PARTICULARLY RELEVANT for the building industry. But they also apply to any business that is involved day-to-day with co-contractors, subcontractors, local authorities and industry professionals such as engineers and architects.

LAW COMMISSION’S THINKING Currently, when a court imposes joint and several liability and any party to the litigation cannot pay their share, the other parties must contribute to the shortfall. The Law Commission’s report is strongly of the view that New Zealand should retain this arrangement, but it has suggested some changes to make the system fairer for all. The Government has undertaken to respond to the recommendations early next year.

IT’S AN OLD DISCUSSION The issue is not new. The Commission noted that the discussion of the relative merits of joint and several liability versus proportionate liability has been ongoing for at least 20 years. The Commission last reported on this issue in 1998. The leaky homes cases have brought renewed calls to deal with perceived problems with joint and several liability. The large numbers involved in any significant building project readily translates to a number of potential defendants for a leaky home claim. Each potential defendant will, most likely, be held to bear differing shares of responsibility while still being jointly and severally liable for the plaintiff’s indivisible damage (primary liability).

LIABLE DEFENDANTS OFTEN UNAVAILABLE The sheer scale of the leaky homes issue in the building industry has contributed to an increasing number of liable defendants becoming unavailable because of personal insolvency or corporate collapse. A shrinking supply of solvent liable defendants to meet some or all of the uncollectable share left by insolvent liable defendants. This is inevitably perceived as unfair by solvent liable defendants, especially if they bore only a small or very small share of overall responsibility. The impact of uncollectable shares also fell disproportionately on certain categories of liable defendants, especially local authorities who cannot become unavailable due to insolvency but have deep pockets funded by ratepayers.

COMMISSION’S RECOMMENDATIONS The Commission’s report concludes that the protection of joint and several liability should continue to be afforded to the innocent party. Thus, liable defendants, who have actually caused the harm, should bear the risk of uncollectable shares of other defendants. But the Commission has recommended a number of adjustments to deliver fairer outcomes: ƒƒ Giving the courts power to make orders that would mitigate the full application of joint and several liability where this would create a clear injustice to defendants who have only a minor responsibility. ƒƒ Changing the rules of contribution so that the costs of an uncollectable share can be spread proportionately among the remaining solvent and liable defendants.

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ƒƒ I ntroducing liability caps for building consent authorities for new liabilities after the leaky home claims have been dealt with.

IS THE BUILDING SECTOR A SPECIAL CASE? It is interesting to look at the direction taken by Australia in the 1990’s. Between 1993 and 1995 three States and both Federal territories introduced proportionate liability for building certifiers and building practitioners. From 2002, this has since been replaced by jurisdiction-wide proportionate liability. A trans-Tasman harmonisation argument suggests that a similar approach could be taken in New Zealand. However, the Commission argues that it is not convinced that there is a case for proportionate liability across the building sector in New Zealand for the following reasons: ƒƒ The Australian approach is backed up by compulsory insurance and statemandated building guarantee or warranty schemes. The inherent difficulty in establishing and maintaining a similar warranty scheme in New Zealand is therefore another factor in the balance when considering the potential problems with an industry proportionate liability. ƒƒ There is no evidence that solvent liable defendants being required to meet part or all of uncollectable shares is a systemic problem, except for local authority participants. Compared to local authorities, head contractor-builders have a relatively low likelihood of having to meet an uncollected share, and if they do it will usually be for a much smaller additional share. ƒƒ Joint and several liability is often blamed for results it does not necessarily cause, and proportionate liability is expected to bring changes that it would not. As explained below, the allocation of liability and costs between head contractor-builders and subcontractors demonstrates this point. The builder is liable for what they have contracted to deliver and what the statutory warranties require – a building that is built with reasonable care and skill and is fit for its identified purpose. Such liability forms part of the builder’s primary liability and would not be overridden by a secondary rule of proportionate liability. In other words, a proportionate liability regime would not enable the builder to automatically pass on portions of liability to a variety of subcontractors. The majority of cases where building contractors are held to bear substantial liability are because of their primary liability obligations arising in contract.

CONCLUSIONS As business advisors, we at Staples Rodway are often asked by our clients whether they should form special purpose companies for particularly large projects and wind them up at the completion of the project. This strategy is sometimes recommended by their lawyers as a way to limit possible exposure to future liability. Other clients keep the company, but make sure it has minimal assets or retained earnings that a creditor could take if the company gets hit with a substantial claim. These practices are a reasonably predictable response to the risks posed by a joint and several liability system. The Commission may be correct that the changes to make the liability proportional may not actually improve the situation, but I wonder whether the work of the Commission has really addressed the nub of the problem for businesses, and the building industry in particular.

NUMBERS Spring 2014 • 21


AUCKLAND Level 9, 45 Queen St PO Box 3899 Auckland 1140, New Zealand Phone 64 9 309 0463 Fax 64 9 309 4544 enquiries@staplesrodway.com

WAIKATO 4th Floor, BNZ Building 354 Victoria Street PO Box 9159 Hamilton 3240, New Zealand Phone 64 7 834 6800 Fax 64 7 838 2881 staples@srw.co.nz

TAURANGA Level 1, 247 Cameron Road PO Box 743 Tauranga 3140, New Zealand Phone 64 7 578 2989 Fax 64 7 577 6030 info@staplestga.co.nz

HAWKES BAY Cnr. Hastings and Eastbourne Streets PO Box 46 Hastings 4156, New Zealand Phone 64 6 878 7004 Fax 64 6 876 0078 info@stapleshb.co.nz

NEW PLYMOUTH 109-113 Powderham Street PO Box 146 New Plymouth 4340, New Zealand Phone 64 6 757 3155 Fax 64 6 757 5081 newp@staplestaranaki.co.nz

STRATFORD 78 Miranda Street PO Box 82 Stratford 4352, New Zealand Phone 64 6 765 6949 Fax 64 6 765 8342 stfd@staplestaranaki.co.nz

WELLINGTON Level 6, 95 Customhouse Quay PO Box 1208 Wellington 6140, New Zealand Phone 64 4 472 7919 Fax 64 4 473 4720 info@stapleswellington.co.nz

CHRISTCHURCH 314 Riccarton Road, PO Box 8039 Christchurch 8440, New Zealand Phone 64 3 343 0599 Fax 64 3 348 0186 enquiries@srchch.co.nz

22 • NUMBERS Spring 2014

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