New Act changes governance of many Crown entities

Simon Watt, Partner | Thursday 3 February 2005

 The Crown Entities Act 2004 (the Act) came into force on 25 January 2005.

The Act is designed to provide a consistent framework within which all Crown entities must operate, to improve governance and accountability of Crown entities and to achieve better integration of Crown entities with the rest of the state sector.

The changes brought about by the Act will be of particular interest to Board members of Crown entities, who will need to consider their position in terms of the new rules on such matters as appointment and removal, conflicts of interest, their duties, liabilities and protection from liability.

Categories of Crown entities

The Act divides Crown entities into the following categories:

• statutory entities, which are either:
  
  
  • Crown agents: non-company Crown entities that have a close working relationship with the government of the day;
    
    
  • independent Crown entities: non-company Crown entities that operate at arm's length from the Government, either because they are quasi-judicial or because they must operate, and must be seen to operate, independently; or
    
    
  • autonomous Crown entities: non-company Crown entities that do not fall obviously into the other two classes;
  
  
• Crown entity companies: companies incorporated under the Companies Act 1993 that are wholly owned by the Crown;
  
  
• Crown entity subsidiaries: companies incorporated under the Companies Act 1993 that are controlled by Crown entities;
  
  
• school boards of trustees; and
  
  
• tertiary education institutions.

Changes in detail

The operations of each Crown entity will be affected differently by the terms of the Act, given their differing natures and structures. For many Crown entities, a number of the changes will be minor and merely procedural. 

However, in order to create uniformity among a group of entities currently governed by diverse requirements, some of the changes will inevitably bring greater changes for some Crown entities.

Set out below are some of the main areas that the Act addresses and the key points under each of these areas.  These points are a general summary of the main areas of the Act and some of the provisions in the Act differ in their application to each category of Crown entity.

Appointment and removal of Board members

• The Act sets out the criteria for the appointment of Board members and lists automatic disqualification criteria, for example for undischarged bankrupts.
  
  
• Responsible Ministers can remove appointed members of Crown agent boards at their discretion.  However, the Minister must have a reason to justify such a removal from more autonomous or independent entities.

Duties of Board members

• The collective and individual duties of Board members of Crown entities are clearly set out in the Act.
  
  
• Board members may be removed from office if the Board fails to comply with its duties.  An entity may also bring an action against a Board member for breach of an individual duty.

Conflicts of interest

• The definition of "interested" in the Act is more detailed and extensive than in many Crown entities' enabling statutes and is not limited to pecuniary interests.  This means that, for many Crown entities, what constitutes a conflict of interest under the Act will be wider than what formerly constituted a conflict of interest under their own Acts.
  
  
• However, the Act also provides that the chairperson of an entity may permit an interested member to act if the chairperson considers that it is in the public interest to do so.  Previously, for many Crown entities, this power was reserved for the responsible Minister.

Whole of government directions

• The Act makes provision for the Minister of State Services and the Minister of Finance jointly to direct Crown entities to comply with specified requirements in order to both support a whole of government approach and improve public services.  This is a new power of direction for most Crown entities.

Protections from liability

• Before the Act, the enabling statutes of Crown entities contained a number of different provisions for protections from liability, and some made no provision for the issue.  The Act imposes a standard regime for immunity, indemnities and insurance.
  
  
• Generally, Board members and employees will not be personally liable provided that they act in good faith and in performance, or intended performance, of the entity's functions.

Validity of acts

• The Act provides that an act of a statutory entity is invalid if it is outside the authority of the Act or done for a purpose other than performing the entity's functions.
  
  
• However, this does not prevent a third party dealing with a statutory entity from enforcing such a transaction unless the third party had known, or ought reasonably to have known that the act was invalid.  The third party will have to prove that it did not have, or ought reasonably to have had, this knowledge.

Reporting obligations

• The provisions for reporting obligations come into force for the 2006/07 financial year.
  
  
• The Act requires that all Crown entities have a Statement of Intent.
• Crown entities will also be obliged to disclose more non-financial performance intentions and results than are currently required.

Investment, borrowing, guarantees, indemnities and derivative transactions

• The Act places limits on a Crown entity's ability to acquire securities, borrow money, give guarantees and indemnities, and enter into derivative transactions
  
  
• These provisions come into force on 1 April 2005.

Advice and information

Bell Gully's Government Group can advise on all types of government issues, including the impact that the Crown Entities Act will have on your organisation.  Contact the team members at the numbers below for more information.