The challenge of projecting financial performances has boosted the potential for financial disclosure breach allegations
The COVID-19 pandemic has heightened the risk of litigation for directors in New Zealand.
According to Chapman Tripp’s latest Litigation & Dispute Resolution—Trends & Insights report, COVID-19 will see businesses bogged down by financial strain, with directors in the hot seat.
“COVID-19 has significantly heightened the risks attached to directors’ decision-making—especially on whether to trade-on when the business is on the tip of insolvency,” said Justin Graham, who heads up the firm’s national litigation and dispute resolution practice. “And projecting future financial performance is now nail-bitingly difficult—giving rise to rich potential for allegations of financial disclosure breaches.”
With many companies expected to fail beginning next year, directors are more likely now to be on the business end of a claim, especially with growing litigation funding activity.
“Claims alleging financial disclosure breaches are likely to grow in size and number over the next 12 months as directors negotiate a perfect storm created by tougher statutory requirements, turbulent economic conditions, and an increased appetite for litigation,” Chapman Tripp said in the report.
Moreover, third-party litigation funders are enabling groups of claimants to file class actions against organisations and government bodies affordably. The firm said that courts exercise a limited degree of oversight over such activity.
“Generally, a third party-funded class action will be allowed where there is an arguable case for rights that warrant vindication, no abuse of process, and the funding arrangement has been approved by the court,” Chapman Tripp said. “However, the courts do not, for example, generally oversee the terms of funding arrangements.”
The firm said that while the “opportunistic class action culture evident in Australia” hasn’t developed in New Zealand yet, regulation may be needed if it does.
Nonetheless, the pandemic has also resulted in improved access to the courts system, which went digital during lockdown and looks to be maintaining some automated operations.
“Now that the COVID-19 restrictions have been rolled back, the courts have adopted an electronic half-way house. They have kept the electronic filing and file management but have walked away from the virtual hearing,” Chapman Tripp said.
As the industry adapts to the increased use of technology, the firm said that that virtual proceedings could be introduced for “case management type hearings and smaller procedural disputes” in the next couple of years.
