2 Cheap hit with $40k fine

2 Cheap Cars Group has been censured by the NZ Markets Disciplinary Tribunal and ordered to pay a penalty of $40,000 for a breach of NZX listing rules relating to independent directors.

The tribunal found the company breached Rule 2.1.1(c) –  the requirement to have at least two independent directors at all times – and Rule 2.13.2(c) – the requirement for an audit committee to have a majority of independent directors.

A determination by the tribunal says the breaches occurred over a period of about eight weeks this year, from March 17 until the week ended May 19, when director Gordon Shaw took on a contractual role at 2 Cheap’s subsidiary, NZ Motor Finance Ltd. 

“Given the importance of the independent director requirements, the tribunal considered that 2CC’s breach was a serious compliance breach,” the tribunal says in an announcement to the NZX on October 4.

It adds such a breach “has the potential to cause a significant impact on investors and the market”, but the potential impact was reduced because 2 Cheap’s board was chaired by an independent director, who was also a member of its audit committee.

Other factors reducing the possible impact included that Shaw did not have a disqualifying relationship, as submitted by 2 Cheap, and while an employee, Shaw had a limited contractual role overseeing the run-down of NZ Motor Finance’s loan book, “reducing the likelihood of management influence”. 

The tribunal notes NZ RegCo did not identify any actual loss or harm to investors as a result of the breach.

It says while the breach appeared unintentional, the tribunal was concerned 2 Cheap “had not adequately considered the implications of Shaw’s contractual role with NZ Motor Finance on his status as an independent director”.

“And statements made in 2CC’s Annual Report 2023 gave the impression 2CC had complied with the independent director requirements, when for a time they had not,” the tribunal says. 

“2CC acknowledged that the matter should have been approached differently, co-operated with NZ RegCo’s investigation and has subsequently taken further steps to improve its compliance practices.”

Besides the $40,000 financial penalty, 2 Cheap was also ordered to pay the costs of NZX and the tribunal “and be publicly censured in the form of this announcement”.

Company response

2 Cheap also issued a statement to the NZX on October 4 and acknowledges it broke the rules when Shaw acted as a part-time consultant for eight weeks to oversee the collection and management of the NZ Motor Finance loan book.

“It was a quick response to an urgent need as a new, lower-cost organisational structure was finalised, but the board acknowledges that a broader consideration should have occurred,” the market update adds.

The company says the finance business is in run-down mode, accounts for 1.2 per cent of group revenue and, at the time of the breach, was subject to restructuring.

Paul Millward, chief executive officer, explains the breach was inadvertent and, while accepted and regrettable, had not caused loss to investors.

“We certainly regret the breach but it was not intentional. No question, we should have more carefully considered the implications with regard to ensuring independent director requirements were maintained at all times,” he says.

“As a small cap company in turnaround mode, protecting shareholders’ interests remains at the forefront of all our decisions.”

The company unsuccessfully appealed against the tribunal’s assessment of the seriousness of the breach, the balance of aggravating and mitigating factors, and the consequent quantum of the final penalty imposed.

2 Cheap says it disagrees with the tribunal’s decision that the breach had the potential to cause a moderate impact on investors and the market, as the “determination noted numerous factors that lessened the potential impact of the breach”. 

“The tribunal’s resulting decision to apply Penalty Band 2, despite the lack of a disqualifying relationship, the limited nature of the role and the short period of the breach remains difficult for the company to understand,” its statement adds.

The company also “strongly disagrees” with the determination of “compliance history” as an aggravating factor, albeit one with a lesser weighting. 

“As reported to the market at the time, the 2022 breach of NZX Listing Rule 2.7.1 was identified by NZ RegCo as unintentional and resulting from reliance on legal advice from a reputable law firm,” says 2 Cheap.

Michael Stiassny, chairman, says while the company accepts responsibility for breaches of the listing rules, it disagrees with the determination of the penalty.

The tribunal referred to a determination involving Hallenstein Glasson Holdings Ltd, which was referred to as a more serious breach and one that occurred over a number of years, in providing a precedent for assessing the penalty parameters. 

2 Cheap says it “remains of the view the differential between the resulting penalties should be higher”, noting Hallenstein Glasson Holdings was fined $75,000 for a breach that lasted four years but its fine was $40,000 for a period of eight weeks.

Stiassny adds: “It is essential that all NZX companies are held to the same standard and the balance of aggravating and mitigating factors when assessing penalties for listing rule breaches are applied consistently. That formed the basis of our appeal.”