Appendix 2: Extract from the Inquiry report

Kaipara District Council: The Auditor-General’s decision on requests to make a report under section 44 of the Local Government Act 2002.

Accountability of elected members under section 44 of the Local Government Act 2002

During this inquiry, many people identified the possible relevance of the powers in the Local Government Act 2002 that enable individual councillors to become personally financially responsible for council losses. Counsel for the MRRA specifically wrote to us to ask us to consider whether these powers should be invoked.

What is the surcharge power under the Act?

The relevant provisions are sections 44 to 46 of the Local Government Act 2002. These provisions are often referred to as "the surcharge power", and versions of this power have been included in local government legislation for many years. The power has been exercised, but only rarely. Effectively, it is a mechanism for making individual elected members liable for losses suffered by the local authority if those losses result from unlawful action that the elected members supported.

Section 44 provides that, if the Auditor-General is satisfied that a local authority has incurred a loss in terms of the definition in that section, the Auditor-General may report on that loss to the local authority, along with recommendations on recovering the loss and preventing further loss. Copies of that report must be sent to every elected member of the local authority and to the Minister.

Section 44 states that a local authority is regarded as having incurred a loss if any of the following have occurred and the local authority has not been fully compensated:

  • The local authority's money has been unlawfully expended.
  • An asset of the local authority has been unlawfully sold or disposed of.
  • The local authority has unlawfully incurred a liability.
  • The local authority has intentionally or negligently failed to enforce the collection of money it is entitled to receive.

Section 45 then provides that the local authority has to respond in writing to the Auditor-General's report within 28 days and provide a copy to the Minister. The response must respond to each of the Auditor-General's recommendations and state what action the authority intends to take. Individual elected members may respond separately. The local authority must then present the original report and all the responses to a public meeting of the authority.

Section 46 states that, if the Auditor-General has made a report on a loss under section 44, then that loss is recoverable as a debt due to the Crown from each elected member of the local authority jointly and severally. In simple terms, each and every elected member of the authority becomes personally liable for that loss. The Crown can bring proceedings to recover the amount on behalf of the local authority.

There are defences available to the elected members under section 46. A court cannot enforce recovery from an elected member if:

  • the person did not know about the action or failure leading to the loss;
  • the person knew but protested against the relevant action;
  • the person voted against the action; or
  • the person supported the action, but acted in good faith and relied on professional advice given by an apparently competent and reliable employee or adviser.

Our decision on use of the surcharge power in this case

This surcharge power is very unusual. It effectively gives the Auditor-General a power to rule that individual elected members have been a party to an unlawful act and are personally liable for the loss that results.

On the rare occasions that the power has been used, the facts have been reasonably contained and straightforward. There has been little if any room for debate about the legal basis for exercising the power.

In this case, the facts and the legal position are far from straightforward. This report has described a long and complex saga, involving sophisticated commercial transactions, considerable professional advice, and decisions made by successive Councils over a long period of time. The legal status of some of the more significant decisions and actions is at present before the High Court.

For the Auditor-General to be able to exercise this power, we would need to be certain that:

  • KDC's losses could be attributed to a particular action or series of actions;
  • the particular action or actions were unlawful;
  • individual councillors effectively supported one or more of those unlawful actions; and
  • it was not reasonable for individual councillors to rely on the advice they received.

These requirements set a high factual and legal threshold. We do not consider that this case meets that threshold for the following reasons:

  • We cannot confidently attribute KDC's eventual debt (or losses in terms of the Act) to particular actions by the Council. This report describes a long history of cumulative problems and poor decision-making. However, section 44 envisages a reasonably direct relationship between an individual decision and a specific loss.
  • We cannot say with certainty which of the many decisions and actions involved in planning the wastewater project, agreeing to the various contracts, and authorising payments were "unlawful" for the purposes of section 44, if any. These are complex legal questions, and many of them are currently before the High Court in the judicial review proceedings brought by the MRRA. It would not be appropriate for the Auditor-General to pre-empt a ruling by the Court.
  • We have not attempted to identify exactly which individual elected members supported or opposed which decisions during the project. We doubt that it would be possible to establish these facts with any certainty, given the state of the records.
  • As this report makes clear, it has not been possible to establish exactly what advice the elected members received from KDC staff or from external advisers for most important decisions during the wastewater project. This means that it would be very difficult to establish whether it was reasonable for elected members to rely on the advice they received. From the information that is available and described in this report, it is likely that a defence under section 46 would be available to many elected members in relation to some or all of the decisions they participated in.