Companies and Limited Partnerships Amendment Bill – finally passed

2 July 2014

Companies and Limited Partnerships Amendment Bill – finally passed
Introduction

At the end of last week the Companies and Limited Partnerships Amendment Bill was split into two Bills (amending the Companies Act 1993 and the Limited Partnerships Act 2008 respectively) and passed. The two Bills are expected to become law soon.

In the words of Commerce Minister Craig Foss, the changes heralded by the two bills are aimed at protecting New Zealand’s international reputation as a trusted place to do business. It is his expectation that these changes will result in New Zealand having a robust regime that will limit the opportunity for dodgy individuals to use shell companies to exploit our good name.

The changes to the Companies Act also introduce offences for very serious misconduct by directors aimed at promoting investor confidence.

The primary changes from the amendments are to:

• require all New Zealand registered companies and limited partnerships to have a director or general partner who lives in New Zealand or is a director of a company in a prescribed enforcement country
• give new powers to the Registrar of Companies to better investigate companies and limited partnerships
• introduce offences for very serious misconduct by directors that results in serious losses to the company or its creditors (i.e. criminalisation of certain breaches of directors’ duties)
• align the company reconstruction provisions in the Companies Act with the Takeovers Code.

The new offences for directors will come into force after Royal Assent.

The registration provisions will not come into force for a further 12 months – with a further 6 month period for existing companies to comply with the resident director requirement.

Changes to the Companies Act

As previously discussed, two new criminal offences have been created for ‘egregious’ breaches of directors’ duties:

• Offence for serious breach of a director’s primary duty: A new offence has been created of exercising powers or performing duties as a director of a company:

o in bad faith towards the company and believing that the conduct is not in the best interests of the company; and
o knowing that the conduct will cause the company serious loss.

• Offence for dishonestly allowing an insolvent company to incur debts: A further new offence has been created (expanding the existing offence provision for carrying on a business fraudulently) of dishonestly incurring a debt occurs where a company incurs a debt at a time when the company is insolvent (insolvency in this context means cashflow insolvency – being unable to pay its debts) or incurs a debt that, on its own or taken with other debts, has the effect of tipping the company into insolvency. In those circumstances, a director of the company commits an offence if:

o he or she knew of the existing insolvency or knew that the company would become insolvent as a result of incurring the debt; and
o the director’s failure to prevent the company incurring the debt was dishonest.

The new offences will be punishable by up to 5 years’ imprisonment or a fine of up to $200,000.

Resident director requirements

One of the drivers for the changes to the Companies Act has been the use of shell companies, set up in New Zealand by shadowy overseas figures. As a result, it will be a requirement for every New Zealand-registered company to have:

• a director who lives in New Zealand, or
• a director who is also a director of a company formed in, and who also lives in, a country with which New Zealand has reciprocal enforcement arrangements (an ‘enforcement country’).

There is no firm indication of which countries will be approved as ‘enforcement country’ – although it is likely that Australia will be the first country to be approved.

Other registration and information requirements

Further compliance obligations to be imposed on are:

• Directors’ date and place of birth: It will be a requirement for directors to supply their date and place of birth information (and their residential address) at the time of registration of a company and on any change of their directorship – as well as for any amalgamation proposal.

The purpose of these requirements is to assist with the verification of the identity of individuals. Note that the Registrar must treat the information as confidential and not make it available to the public (including by means of Official Information Act requests).

• Details of a company’s ultimate holding company: It will also be a requirement that details of a company’s ultimate holding company (if it has one) is disclosed at the time of registration and kept up to date. Unlike the verification details of directors – these details will be publically available.

Enhanced powers of the Registrar

The Registrar of Companies will have additional powers (enabling investigation and administrative action where there are concerns about the legitimacy of a company and its operations) to:

• require companies, directors, and shareholders to confirm or correct existing information on the register;
• inserting a note of warning on the register – as a flag that a company is under investigation by;
• remove a company from the register in certain circumstances;
• prohibit persons from managing companies where that person was involved in the management of a company that was removed from the register in specified circumstances; and
• to the extent necessary, extend the Registrar’s investigation powers to matters where a company or its directors have not complied with the disclosure requirements of the Companies Act.

Whilst these enhanced powers are largely aimed at the initial drivers behind the amendments it should also be noted that the Registrar will also have enhanced powers to remove a company from the register where the Registrar has reasonable grounds to believe that the company, or one or more of its directors or shareholders, has failed “…in a persistent or serious way to comply…” with the Companies Act or the Financial Reporting Act 1993 (while it is still in force – and for a further 5 years).

As a result, a number of commentators have pointed to the need for companies to ensure that they have compliance measures in place to avoid being labelled a persistent or serious infringer.

New powers for Registrar to identify controllers of companies

The Registrar is also being given specific powers to identify the controllers of companies – to ensure compliance with New Zealand’s FATF obligations (to protect against money laundering and the financing of terrorism). These new powers will allow the Registrar to ascertain from certain specified persons (including the shareholders and directors):

• who has (and who has the power to acquire) a ‘control interest’ in shares of the company – with a control interest being defined in a similar way to the definition of ‘relevant interest’ under the Securities Markets Act 1988; and
• certain ‘control information’ relating to a company – being directions or instructions relating to the management and administration of the company or delegation of powers relating to the management and administration of the company.

Information gathered by the Registrar using these new powers will be able to be used by various government agencies for certain law enforcement purposes, as well as the Companies Act, including the AML/CFT regime and for anti-terrorism and security matters.

Arrangements and amalgamations of code companies

The Companies Act is also amended in relation to schemes and amalgamations for code under the Takeovers Code. This is largely an alignment process – and includes:

• Part 13 amalgamations: The use of a long-form amalgamation under Part 13 of the Companies Act is prohibited where an amalgamating company is a code company. (Note that a scheme of arrangement involving a code company can still be a pursued under Part 15 of the Companies Act.

• Court-approved schemes: A scheme of arrangement under Part 15 that involves a change in the relative percentage of voting rights cannot be approved by a court where a code company is the subject matter unless:

o the court is satisfied that the shareholders of the code company will not be adversely affected by the use of a scheme rather than the Takeovers Code to effect the change of control involving the code company; or
o Takeovers Panel states that it has no objection to the scheme.

• Approval thresholds: Shareholders may only approve an arrangement or amalgamation by:

o a resolution approved by a majority of 75% of the votes of the shareholders in each interest class entitled to vote and voting on the question; and
o a resolution approved by a simple majority of the votes of those shareholders entitled to vote (i.e. 50%+ of all shareholders entitled to vote – not just a majority of those voting).

• Interest class: A new schedule 10 has been added to the Companies Act containing principles to be applied in order to determine what is an ‘interest class’ for the purposes of voting on a resolution to approve a scheme of arrangement.

• Exemption for court-approved schemes: The Takeovers Code is expressly stated not to apply where the court has made an order approving a Part 15 scheme in relation to a code company.

These amendments come into immediately – and include transitional arrangements for a code company that has already begun a process to amalgamate under Part 13 of the Companies Act before the new provisions took effect.

Changes to the Limited Partnerships Act

A corresponding series of changes are also being made to the Limited Partnerships Act, including:

• General partner with a connection to New Zealand: There is a new requirement for a general partner to have a connection to New Zealand or an ‘enforcement country’ by requiring:

o a general partner who is either a natural person living in New Zealand or who lives in an ‘enforcement country’ and is a director of a company that is registered in that country; or
o a general partner that is a limited partnership with at least one general partner who is either a natural person living in New Zealand or who lives in an ‘enforcement country’ and is a director of a company that is registered in that country; or
o a general partner that is a partnership governed by New Zealand law (i.e. the Partnership Act 1908) that has at least one partner who is a natural person living in New Zealand or who lives in an ‘enforcement country’ and is a director of a company that is registered in that country; or
o a general partner that is a New Zealand registered company; or
o a general partner that is an overseas company registered under the Companies Act with at least one director living in New Zealand or who lives in an ‘enforcement country’ and is a director of a company that is registered in that country.

• Identifying information for general partner: As with companies, additional information must be provided in applications to become a limited partnership, as well as annual returns, and will also appear on the register of limited partnerships to assist with verifying the identity of the general partner.

• Enhanced powers to identify control interests of a limited partnership: In sympathy with the changes to the Companies Act, the Registrar has also been given specific powers to identify the control interests of limited partnerships in order to comply with New Zealand’s FATF obligations.

• Other enhanced powers for Registrar: The Registrar has also been given further powers to:

o issue notes of inactivity or warning against a limited partnership in the register;
o deregister a limited partnership in certain circumstances; and
o prohibit a person from being a general partner (or a promoter) of a limited partnership in certain circumstances.

Qualifications for general partners

The Limited partnerships Act has been amended, so that all natural persons who are general partners (or the directors, partners, or general partners of a general partner) must now meet qualification requirements equivalent to those for a director under the Companies Act. This change fixes a “gap” – as the Limited Partnerships Act does not currently require any qualifications for general partners.

Changes to annual returns

In addition to the other changes designed to aid verification and control interests, additional information is required in the annual return of a limited partnership if the limited partnership has been the offeror or issuer of financial products under a regulated offer. This requirement is in keeping with the introduction of the Financial Markets Conduct Act 2013 which will start to come fully into force on 1 December 2013 .

Timeline

A number of the key changes (particularly those relating to the resident director requirements and the enhanced powers of the Registrar) do not come into force until 12 months after the date of the Royal assent . And existing companies will then have a further 6 months within which to comply with the resident director requirements.

Further information

If you would like more information about any of the matters discussed in this note, please contact me.