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Companies Act makeover

by Stephen on August 15th, 2024

An article in the media this morning is billed as unveiling the Government’s vision for changes to the Companies Act. 

The work was foreshadowed by Commerce Minister, Andrew Bayly, in a speech at the end of January that signalled a number of law reform workstreams, including work to simplify, modernise, and digitise the Companies Act.

Since then, work has been going on behind the scenes in MBIE and with a sort of ad hoc working group on a series of detailed proposals and some important supplementary points that have arisen in transit.

The Minister has said that the product of this work is the largest set of modifications in the 30-year history of the Companies Act.  The result is proposals for changes to:

  • major transactions
  • identifying shareholders and directors on the Register
  • modernisation to enable more things can be done online
  • expanded scope for use of the New Zealand Business No
  • changes to insolvency provisions

The Minister said that the introduction of a bill is still some months away and legislation is not likely to have its first reading until early 2025 – after which it will go through a full select committee process with a target completion date for the end of next year.

Regrettably, the review of concerns about the law relating to directors’ duties and liabilities will not start until the beginning of next year – pointing a longer road to law reform.

Major transactions

The proposed changes are designed to address some longstanding uncertainties by providing that transactions which relate solely to the company’s capital structure (share issues particularly – but also share buybacks, redemptions and dividends) would not fall into the major transactions bracket.

As well as improving efficiency, an anti-avoidance measure is also signalled, designed to prevent an end run around the need for major transaction approvals by breaking the transaction up into a series of smaller (related) transactions or by channelling through a subsidiary.

Shareholder/director identity

The media reports the Minister as saying that new identity rules would have a number of functions.  Amongst other things, this would enable directors to keep their residential address confidential.

This is a change that has been requested for some time.  However, directors will still need to provide an address for service and will be identifiable through an identification number which should allow the public to see what other companies they govern. 

The address for service would need to be that of a professional firm (lawyers or accountants, etc) or another real-life permanent address of some kind.  It could not just be a postbox or a temporary office.

Section 131(5) – a hero’s death

The Minister also signalled the repeal of section 131(5), brought in by the previous Government, with the aim of making it clearer that directors could consider things beyond profit maximisation (such as ESG factors) when considering the best interests of the company.

Whilst this ‘for the avoidance of doubt’ provision did not mandate a wider view of the company’s best interests, the Minister said that feedback supported his concerns that it was unfairly imposing one view across the board on the business community.

This, alone, should add some colour to the Select Committee process. 

Phoenix companies

The Minister has made much of seeking to weed out fraudulent activity such as the problem of people registering companies under slightly different versions of their own name and reducing the risk confusion about company ownership involving people of the same name.

This, the Minister is reported as saying, would help combat the incidence of ‘phoenix companies’ – when companies transfer assets into another entity – sometimes with a similar name – and then liquidate leaving only debt.

In this regard, following the pattern overseas of using director identification numbers (whilst shielding director residential addresses from public view) was seen as another integrity measure whilst allaying the safety fears of would-be directors.

Changes to insolvency provisions

The Minister is also quoted as saying that the views of insolvency practitioners has been considered in relation to the need for tighter controls on transactions between related companies that are subsequently liquidated.  In large part, this seems to be a response recommendations almost a decade ago from the Insolvency Working Group, proposing:

  • an extension of the clawback period for voidable transactions with related parties – from 2 years to 4 years
  • clarifying some matters relating to the classification of certain employee claims as ‘preferential claims’ in a liquidation
  • measures designed to encourage liquidators to pursue claims for reckless trading

Better protection for the holders of gift cards and vouchers was also mentioned.

Digitisation

New measures are planned to enhance the scope for the digital / virtual performance of compliance and other measures by companies, and make better use of the Companies Office functionality – to address concerns that whilst its registries can operate digitally, the Companies Act had not kept pace with those technological developments. 

Examples of this included specifically enabling companies to conduct virtual meetings as a sort of virtual default setting rather than having to (first) include specific provisions in the constitution enabling the company to do so.

According to the Minister, the plans for increased digitisation appear likely to include expanded use of the New Zealand Business Number (NZBN), both as a ready means of identification and to enable companies to better satisfy their AML/CFT obligations.

Other changes being suggested by the Minister for a wider remit for the use of NZBN, including by enabling the NZBN to be useable on other business registers and applications for using NZBN data for identity verification and preventing scams, as well as the addition of a small business identifier (making it easier to support a voluntary code on payment times for small businesses) look to be further afield.

Directors’ duties – review

It should also be noted that, at the beginning of June, the Minister of Justice announced that the Law Commission had been asked to undertake a review of directors’ duties and liabilities.  Specifically:

  • The announcement noted that duties in the Companies Act relating to reckless trading and incurring obligations are particularly unclear and difficult to apply as they are currently framed and may discourage directors from taking legitimate business risks.
  • And because directors can be personally liable under a range of other legislation, the review is to consider the overall burden of liability on directors, including its impact on directors’ willingness to take legitimate business risks and its consistency with the underlying purpose of directors’ duties in the Companies Act.

Regrettably, in part (it seems) because the Law Commission’s work is set on an annual basis, this piece of work is not due to start until the first half of 2025.  The law relating to directors’ duties and liabilities has been causing concern for some time – and a number of parties have been calling (and lobbying) for a review as a matter of urgency.

More information

For more information, please do not hesitate to contact me.

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