A recent Gisborne case involving the clean-up of forestry slash and debris is a reminder that a company structure will not always shield directors from personal liability.
Three forestry directors lost their High Court appeal and will personally be liable for the costs of cleaning up woody debris and sediment left behind from their operations.
The judge said the directors had responsibility for ensuring the company complied with its resource consents and that “there is nothing especially unreasonable about imposing personal liability on them”.
The case comes at a time when environmental considerations are becoming increasingly relevant to board decision-making. Section 131(5) of the Companies Act 1993 confirms that directors may consider environmental and social factors when determining what they believe to be in the best interests of the company.
The role of an executive director
Executive directors are particularly exposed when environmental compliance issues arise because they are the bridge between the board of directors and the company’s daily operations. They have more information and influence over the company and have fewer excuses if they contribute to a breach of duty or ignore any warning signs.
Where an executive director knows about any environmental breach, they should ensure the issue is raised, independently checked, recorded and remedied. Failure to acknowledge or remedy such a breach may lead to them being personally liable, as seen in the forestry case.
Increased risk of liability from climate change
Climate change is a growing issue and we see that in severe weather events and the damage they cause. These events increase the risk associated with environmental compliance, as extreme conditions such as intense rainfall, flooding and erosion can severely disrupt operations and damage the surrounding environment. Companies that operate in those areas can in turn be impacted.
Failing to adequately prepare for these risks can result in massive clean-up liabilities and increased personal exposure for directors if they fail to remedy any damage to the environment.
In the forestry case, the judge said, “whether the directors were paid minimally or handsomely, they had a responsibility to ensure that the company complied with the Resource Management Act 1991 (RMA). The consequences of their failure to do so in this case are the resulting enforcement orders against them”.
When it comes to future liability, this will likely turn on foreseeability. The concept of foreseeability does not mean directors must prevent every loss or personally manage every risk. However, it does mean they need to ensure there are reasonable and appropriate systems in place to identify risk, monitor compliance, respond to warning signs and document decision-making.
Practical considerations from this case
Boards should consider whether they have:
- Clear reporting on environmental and consent compliance
- Regular updates on high-risk sites and operations
- Independent advice where risks are significant
- Systems that are actually followed
- Detailed plans for extreme weather events
- Clear records of board discussion and decisions
A culture where environmental risks are important and addressed early.
While forestry slash and directors’ duties might be a surprising mix, the recent case does show that directors can be judged on how they responded to these situations.
Authored by Steven Moe MInstD, Partner, Parry Field Lawyers; and Matthew Al-Sammak, Law Clerk, Parry Field Lawyers
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Originally published by the Institute of Directors. Republished with permission. The views expressed are those of the author and do not necessarily reflect the views of the Institute of Directors.
