30 June 2016

Financial Statements: Prain and Schroeder v. Financial Markets Authority

Apple Fields directors’ convictions for failing to file audited financial statements were overturned on appeal.  They were powerless to demand information from a “deemed” subsidiary required for Apple Fields’ consolidated financial statements.  Without consolidation, accounts complying with the Financial Reporting Act could not be finalised or audited.
Mark Schroeder and Justin Prain challenged convictions for failing to file Apple Fields’ financial statements for the 2011, 2012 and 2013 financial years.  They had taken all reasonable and proper steps to comply, they said.  Apple Fields ran into problems with a 254 lot residential subdivision in Yaldhurst, Christchurch.  It is being developed with joint venture partner Noble Investments Ltd.  A profit share agreement with Noble resulted in Noble becoming a “deemed” subsidiary of Apple Fields.  Noble’s management refused point-blank to allow Apple Fields’ auditors access to financial information.
Apple Fields directors acted reasonably by relying on professional accounting advice that consolidation was required, the Court of Appeal ruled.  They also acted reasonably by not bothering to seek legal advice over whether Noble could be forced to provide financial information, the Court ruled.  Apple Fields had no control over Noble management.  There was no evidence of any contractual right in joint venture documentation giving Apple Fields a right to access Noble’s financial records.
Prain and Schroeder v. Financial Markets Authority – Court of Appeal (30.06.16)

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