Companies Act Reforms Right Around the Corner
- Business Central
- Oct 21, 2024
- 2 min read
Updated: Nov 5, 2024
In August, the Minister of Commerce and Consumer Affairs Andrew Bayly, announced the government will move forward with a raft of reforms to help ensure the rules governing companies are clear, workable and fit for purpose.
The Companies Act 1993 (the Act) governs how companies in New Zealand are established, operated and dissolved, and defines the relationships between companies and their directors, shareholders and creditors. The Act is now more than 30 years old, and although it has been amended over time, the government intends to improve upon it to benefit Kiwi businesses and the New Zealand economy.
The reforms are intended to take place in two phases.
Phase One: Is intended to modernise the Act, simplify compliance, and deter poor and illegal business practices such as “phoenixing”. It is anticipated the Bill introducing the Phase One reforms will be introduced in early 2025. Among the specific proposed reforms are:
To modernise, simplify and digitise the Companies Act 1993, including changes to the definition of “major transaction”.
Introduce unique identifiers for directors and general partners making it easier to identify all companies a director is associated with.
Allow director and shareholder home addresses on the Companies Register to be replaced with an address for service.
Improve the effectiveness of insolvency law to improve outcomes for creditors.
Improve uptake of the New Zealand Business Number (NZBN).
Make technical changes that were proposed to be included in the Regulatory Systems (Economic Development) Amendment Bill.
Introduce a levy making power to help fund the Insolvency and Trustee Service.
Phase Two: Is anticipated to commence in the first half of 2025 with the New Zealand Law Commission reviewing directors’ duties under the Act and related issues of director liability, sanctions and enforcement.
The review will be led by Commissioner Geof Shirtcliffe, who recently commented that that “[d]uties 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”.
These issues were highlighted by the Supreme Court in Yan v Mainzeal Property and Construction Limited (in liquidation) [2023] NZSC 113 where Mainzeal’s directors were held liable for trading in a manner that created a serious risk of substantial loss to creditors. They were held liable for $39.8 million in compensation plus interest. The judgment is substantial and considered a wide range of issues relating to obligations under the Act that are beyond the scope of this article.
Nonetheless, both the Court of Appeal and the Supreme Court voiced support for a legislative review of the Act to help address a “general incoherence” in how the statutory directors’ duties are applied in practice, with the judgments focusing heavily on the need to protect creditors. Such a review is timely given the current economic climate, which is no doubt a highly challenging commercial environment for directors and business leaders needing to balance taking legitimate business risks while prudently assessing the potential risk of serious loss to creditors.