Dentons
A useful last resort: pursuing directors personally for unpaid company debts
What if you are owed money and you believe a director is in breach of their duties?
In an encouraging move, the Government announced plans to “modernise, simplify and digitise” company law in New Zealand. These reforms, set to unfold in two phases, seek to address longstanding issues and adapt the Companies Act 1993 to meet the needs of businesses operating in the present day.
The first phase will involve the introduction of several proposed reforms to the Companies Act, including:
1. Reforms that aim to modernise corporate governance, such as:
2. Improvements to corporate insolvency law in New Zealand, such as:
3. Amendments that will combat illegal business practices, such as phoenix behaviour – where companies dissolve and reincorporate to avoid paying debts – including by assigning company directors and general partners a unique identification number to help track corporate histories.
4. Changes that protect the personal privacy of company directors and shareholders by giving them the option to remove their home addresses from the Companies Register, replacing them with an address of service. This move aligns with broader privacy concerns and aims to provide a more secure environment for those involved in company management.
5. Reforms that will focus on increasing the uptake and use of the NZBN. It is proposed that this will help to reduce the administrative burden on businesses, prevent scams, and facilitate digital transactions by more easily verifying a business identity.
The reforms do not include a Beneficial Ownership Register (proposed by the last government in an attempt to provide better visibility of individuals who control companies and limited partnerships). MBIE “. . . will provide an update on this project in due course”.
The changes to the Companies Act are designed, says Commerce and Consumer Affairs Minister Andrew Bayly, to make New Zealand an easier and safer place to do business: “. . . we need to ensure our companies are not hamstrung by out-of-date laws and onerous red tape, while also making sure there are safeguards in place to deter bad actors and dodgy business practices.”
Legislation for the phase one changes is intended to be introduced in 2025 and will go through a select committee process, so there will be an opportunity for interested parties to have a say about the proposed changes.
“When compared to the reforms in phase one, the issues related to director duties in phase two will require deeper consideration before going through the legislative process.”
The second phase of reform, also due to kick off next year, will require a comprehensive review conducted by the Law Commission, focusing on director duties, director liability, penalties and offences, and enforcement mechanisms.
It will look specifically at the issues raised in the Mainzeal litigation, where the Supreme Court emphasised the need for the Companies Act to strike an appropriate balance between encouraging directors to take prudent business risks and providing protection for creditors.
Striking this balance under the current legislation can be difficult, and the Supreme Court endorsed the earlier view of the Court of Appeal that a review of the director duties provisions would be appropriate. The Government’s announcement regarding phase two will therefore be welcomed by existing and intending directors.
We commend the two-phase approach. Many of the issues to be addressed in phase one will be helpful to the business community and so should be advanced promptly to ‘modernise’ our 31-year-old Companies Act.
The reform follows engagement with company law experts that identified concerns with the present regime, as well as earlier recommendations made by the Insolvency Working Group. This engagement has ensured the specific issues targeted are those which have raised public, judicial and academic concern.
When compared to the reforms in phase one, the issues related to director duties in phase two will require deeper consideration before going through the legislative process.
The Government has recognised this and we agree a review by the Law Commission is an appropriate step. We hope that reform around director duties considers overseas options, including the use of the ‘safe harbour’ mechanism found in the Corporations Act in Australia that provides protection for directors of distressed companies who are taking appropriate professional advice during a restructuring process.