Our Partner Steven Moe has collaborated with Arts and Not for Profit leader Anne Rodda to co-write the White Paper, “Tomorrow’s Board Diversity: The Role of Creatives” which can be

downloaded here.

This is part of our ongoing initiative to support thought leadership regarding Governance and the Arts, NFP and ‘For Purposes’ initiatives in Aotearoa New Zealand. Other examples include the just released “Charting the Future: A Framework for thinking about Change” here. To find out more about us have a browse of this website and the free resources in the tab above. If you have comments on the paper we’d love to hear them, email stevenmoe@parryfield.com.

Advance readers of the White Paper have commented:

“This White Paper brings to light a topic which is often neglected: the role that creatives can play on boards. In our experience, directors who have a range of diverse and creative talent, capabilities and knowledge bring different perspectives to decision-making, planning and board culture – that will likely enhance an organisation’s performance, as well as better represent the stakeholders.”
Kirsten Patterson (KP), Chief Executive, New Zealand Institute of Directors.

“I have been fortunate to always have had a strong musical and artistic background that has become the pillar stone to my creative success in business.” Sir Michael Hill

Parry Field are now registered as a Service Provider under the Regional Business Partner Network. If you are looking to grow your business but require some support, you may qualify for vouchers to help pay for services, as Parry Field are able to provide legal support in the following categories:

Business Planning: We can provide training for Directors of businesses who are looking at their plans and considering what changes they might need to put in place or those who are looking to start a business and are planning the first steps they need to take when it comes to legal structures.

Capital Raising: Growing your business is important and we can provide training around how business owners can raise funding for their venture, covering topics such as types of investors, due diligence processes, Financial Market Authority rules and documentation often needed, such as share Sale and Purchase Agreements and Shareholder Agreements.

Governance: It is important that you have all the right practices, processes and policies in place in order to guide your business in the right direction. Therefore, it is important to know and understand how to run a business, as well as the legal obligations that are associated with it. We can provide you with the knowledge of different legal structures that will assist you in deciding the best structure for the business based on what stage it is at. We will also assist with director duties, governance documents, explain how these work and the importance of having the right documents in place.

If you would like to know more, please contact the Regional Business Partner Network www.regionalbusinesspartners.co.nz

The Government has announced several urgent insolvency and corporate law changes in response to the COVID-19 Pandemic, in an attempt to keep solvent businesses afloat during this turbulent economic period. These include:

  • permitting electronic signatures where necessary;
  • giving entities unable to comply with their constitutional obligations because of the pandemic temporary relief;
  • giving the Registrar of Companies authority to extend deadlines imposed by legislation
  • amending sections 135 (“reckless trading”) & 136 (“duty to relation to incurring obligations”) of the Companies Act 1993 to afford directors greater comfort when making difficult decisions regarding their ability to continue to trade;
  • bringing forward changes to the voidable transactions regime; and
  • introducing the business debt hibernation scheme.

Once enacted, the Government has confirmed their application will be given retrospective effect from 3 April 2020.

Changes to Directors’ Duties

In light of concerns directors may prematurely place companies into liquidation for fear of personal liability incurred should they continue to trade or to take on new obligations, two significant amendments have been made to sections 135 & 136 of the Companies Act 1993.

  • Section 135 places an obligation on directors to abstain from agreeing, causing or allowing for a company to be operated in a manner likely to create a substantial risk of serious loss to the company’s creditors.
  • Section 136 places an obligation on directors to abstain from taking on a new obligation if they do not believe, on reasonable grounds, that the company will be able to fulfil its obligations under the arrangement.

Under the  announcement, directors who continue to trade (including the taking on of new obligations), will be afforded a “safe harbour” period from potential claims providing these criteria are met:

  • the directors consider, in good faith, that the company is or will likely face significant liquidity problems in the next six months due to the pandemic;
  • the company was able to pay its debts as they fell due on 31 December 2019; and
  • the directors consider in good faith that it is more likely than not the company will be able to pay its debts as they fall due within 18 months (for example, utilising the business debt hibernation scheme to get the business back on track).

This “safe harbour” is to be enacted for (initially) a six month period. Notably, directors must continue to act prudently and in good faith in their dealings with creditors, as all other directors’ duties continue to apply including the duty to act in good faith and in the best interests of the company under s 131.

How the change to section 136 will be drafted will be of great interest to directors of companies currently under pressure as a result of the lockdown. The requirement that director(s) be satisfied that “…the company will be able to pay its debts as they fall due within 18 months” may be challenging for directors, who will have to show they has maintained appropriate financial records consistent with the size and nature of the company, that their assumptions are reasonable and (where appropriate)the directors have acted on advice. Contracts with longer-term obligations such as  leases may not fall within the safe harbour period so directors need to be prudent when accessing longer-term obligations, whether existing or new.

With this in mind, it is important to keep accurate and up-to-date financial information. This includes reasonable budgets and forecasts for the next 18 months. This will allow directors to reach an informed decision on the company’s likelihood of being able to meet its debts as they would fall due in 18 months.

Changes to sections 135 & 136 come at a time when directors are increasingly concerned about their civil liability when dealing with third parties while their business is struggling. Often this results in directors prematurely resigning and appointing an external administrator. This is in part due to the recent High Court decision in Mainzeal Property and Construction Limited v Yan discussed here under which the directors of Mainzeal Property Limited were collectively ordered to pay NZ$36 million for a breach of section 135.

In December 2019, the Companies (Safe Harbour for Insolvent Trading) Amendment Bill was proposed with a view to alleviating directors’ concerns regarding their liability when deciding to continue trading, notwithstanding the company being insolvent. This Bill reduces directors’ civil liability when a company is (or will become) insolvent and its directors undertake new debts in an attempt to improve the company’s position. It remains unclear what extent the amendments mentioned hereinabove will reflect contents of this Bill.

Changes to the Voidable Transaction Regime

According to the current voidable transaction regime, a liquidator can “claw-back” payments made from the debtor company to its creditors two years before its liquidation. It has been proposed to shorten the two year vulnerability period to six months when the debtor company and the creditor are unrelated parties. Originally, this change was contained in the Insolvency Law Reform Bill, however the Government has included it amongst the recent changes because of the increase of liquidations predicted.

Business Debt Hibernation

The Business Debt Hibernation Scheme (“the Scheme”) is to be introduced to the Companies Act 1993 to supplement the relief measures that already exist between creditors and businesses. Debt hibernation effectively allows businesses to place their existing debts into “hibernation” until they are able to start trading again.

With the rationale of enhancing a company’s ability to stay afloat in the face of the pandemic, the scheme aims to:

  • increase discussions between creditors and directors;
  • enable directors to keep control of their companies rather than appointing an external administrator;
  • encourage continued trading between the company and its creditors by providing certainty to both parties; and
  • be simple and flexible.

Companies wanting to participate in the Scheme will have to meet certain criteria. This has not been announced in full, but it is expected to include:

  • the business would have been solvent had the Pandemic not occurred;
  • it would be in the best interests of the business (including its ability to pay creditors) for the business to enter debt hibernation;
  • the creditors of the business will need to be notified of the company’s intention to enter into the Scheme;
  • once the company notifies its creditors of their intention to enter into the Scheme a one-month moratorium will take effect immediately while creditors cast their votes;
  • consent must be obtained by at least 50% of creditors;
  • if the business obtains the consent of 50% of creditors, the Scheme becomes binding on all creditors, except employees, and there will be a moratorium on the enforcement of debts for a six month period once the proposal is passed; and
  • further payments made by the company to third party creditors during the Scheme will be excluded from the voidable transactions regime – this affords third party creditors with greater protection that, in the event of the company’s insolvency, the advance will not be clawed back.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Should you need any assistance with this, or with any other commercial matter, please contact Peter van Rij at petervanrij@parryfield.com or Tim Rankin at timrankin@parryfield.com

If a former Prime Minister of New Zealand is involved in a case then you know it is going to attract interest.  Dame Jenny Shipley was the Chair of the Board of Mainzeal and it was found that the directors had breached their duties – what happened, and most important, what can we learn from this?

As a director of a company you must act honestly, in the best interests of the company, and with reasonable care at all times. You must not act or agree to the company acting in a manner that is likely to breach the Companies Act 1993, other legislation or your company’s constitution.  The outcome of the Mainzeal case comes as a timely reminder to company directors of their duties and obligations.

Founded in 1968, Mainzeal was one of the leading construction companies in New Zealand, responsible for projects such as the ASB Sports Centre in Wellington and Spark Arena in Auckland, just to name a few. However, the construction industry was sent into shock when Mainzeal collapsed and was placed into liquidation in February 2013. Unbeknown to many, Mainzeal had been struggling financially for a number of years. So much so, that Mainzeal’s liquidators brought proceedings against the former Mainzeal directors, claiming they had breached their duties under section 135 of the Companies Act 1993.

What Happened?

The details are summarised at the start of the case: “In 1995, an investment consortium with a focus on investments in China acquired a majority shareholding in Mainzeal’s then holding company. This investment consortium was associated with the first defendant, Mr Richard Yan.  The company group came to be known as the Richina Pacific group.  In 2004, the group established a new independent board for Mainzeal with the third defendant, Rt Hon Dame Jennifer Shipley, as Chairperson.  It operated for nearly 10 years under this board until the company collapsed in February 2013.  Its collapse left a deficiency on liquidation to unsecured creditors of approximately $110 million.  The unpaid creditors were sub-contractors ($45.4 million), construction contract claimants ($43.8 million), employees not covered by statutory preferences ($12 million), and other general creditors ($9.5 million).  Mainzeal’s secured creditor, BNZ, was fully paid out.”

Were the director’s reckless?

The crux of the claim came under section 135 of the Companies Act . This section specifies that a director of a company must not—

  • agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors; or
  • cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.

Ultimately, the court had to consider if Mainzeal’s directors had been reckless in continuing to trade while Mainzeal’s balance sheet was in deficit, thus placing the company’s creditors at a substantial risk of serious loss?

Mainzeal had been trading as insolvent from as early as 2005, when Richina Pacific group extracted considerable funds from Mainzeal by the way of loans for investment in China. However, Mainzeal continued to operate as a going concern, as Richina Pacific provided letters of support for when Mainzeal’s accounts were audited. The directors were also given assurances by email and in meetings that support would be provided by the parent group if it was needed.  These representations  of financial support  were relied on by the directors – but they should have done more.  It is important to note that the promise to provide financial support when necessary was never formalised or legally binding (eg loan agreements or guarantees).

The ability for Richina Pacific to provide financial assistance when needed was also limited due to stringent foreign exchange controls exercised by the Chinese governmental authorities. Therefore, this made it extremely difficult to take money back out in China, once it had been taken from Mainzeal.

Mainzeal continued to trade, largely relying on funds that were owed to sub-contractors.  It must have been a difficult balancing act to work out how long to continue trading in those difficult circumstances.   Ultimately,  Mainzeal was unable to pay its debts and was placed into liquidation on 28 February 2013.

Looking at the case there are some fascinating exchanges by email between the Directors and representatives of the parent company.  For example, Dame Jenny Shipley wrote:

“While I note your desire to run a central treasury function for the NZ interests it is unreasonable to ask Mainzeal Directors to approve the associated related party transfers without the clear understanding if we are liable for these decisions and the associated obligation or of other persons or Directors are legally responsible. We are not informed as to the purpose of these transfers and would not need to be so if we had a clear indication from those responsible for the group that the request had been approved…”

So the directors were asking some questions – which is always good.  But they relied too much on answers like this one that came in reply to these comments above:

“Again, there are no independence issues here as it is ultimately the shareholders who are on the hook for everything. Mainzeal is no in way compromised and Richina has always supported it to the full extent even during its more dire situations…”

Another experienced director, Sir Paul Collins, wrote: “I would have to say I’m at my wits end.  I joined the board under the impression Mainzeal was solvent … I accepted all your representations re support and more recently redomiciling in NZ later this year and taking out the BNZ. As you will well appreciate I have dealt with a lot of bad news stories over the years and have found that matters can be worked through when you have all the cards on the table. I don’t have that confidence here. …”

What should the directors have been doing?  Asking questions – like they did.  What they failed to do was getting the answers documented in binding legal agreements.

The court found that the directors had breached their duties under section 135:

Whilst all the factors I address below are relevant, there are three key considerations that cumulatively lead me to conclude the duties in s 135 were breached:

  • Mainzeal was trading while balance sheet insolvent because the intercompany debt was not in reality recoverable.

(b) There was no assurance of group support on which the directors could reasonably rely if adverse circumstances arose.

  • Mainzeal’s financial trading performance was generally poor and prone to significant one-off loses, which meant it had to rely on a strong capital base or equivalent backing to avoid collapse.”

It was held that those were the three key elements in establishing that there had been a breach by the directors.  The Court then went on to confirm:

“The policy of trading while insolvent is the source of the directors’ breach of duties, however, such a policy would not have been fatal if Mainzeal had either a strong financial trading position or reliable group support. It had neither.”

As the directors had been found in breach of section 135, the court awarded $36 million in damages.  A large sum of money for anyone.  The Court found that three directors, Dame Jenny Shipley, Mr Peter Gomm and Mr Clive Tilby had acted honestly and in good faith, therefore each were held liable for up to $6 million jointly with Mr Yan.

This did not go unchallenged. The court left the door open for the parties, if they believed there had been a miscalculation in the amount of damages awarded. Both the liquidators and former directors believed there had been, however both parties had their cases dismissed. An appeal and cross-appeal have now been filed by the liquidators and former directors. This is scheduled to be heard in the Court of Appeal in 2020.

What can we learn: What should the directors have done?

There were a number of red flags for the directors throughout the years. With the benefit of hindsight, there are some important lessons that can be taken from this case:

  • It’s really simple, but ask questions. Understand the answers and document them well.  If someone says there is support, get it in writing.
  • If you are questioning the information you are receiving from others or it makes you feel uncomfortable, seek independent advice from a professional.
  • When relying on assurances from others, ensure these are in writing and legally binding.
  • Understand your duties as director. Ensure it is clear to whom your legal duties lie with. This is particularly important if your company is part of group of companies.
  • If you are facing financial difficulty, continue to review the situation and be extra-vigilant.
  • If you have been provided of assurances of financial support, ensure such assurances are clear – ask questions.

Examples of questions could include: How much financial support is available? Are the finances readily available and if not, how long will it take? What are the barriers that need to be overcome?  How can we ensure we can legally rely on these assurances?

 Conclusion

With an Appeal on foot, it appears that there is more to be said on this matter. However, what can be taken away from this case is the importance of the obligations and duties directors have to a company.   The case really emphasised the care that is required, especially if a company is in financial difficulty.  It also highlighted, if ever in doubt, seek independent advice, as it is better to be safe than sorry.  Also, ask questions and document the answers so there is a clear trail.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation.  Please feel free to contact Steven Moe at stevenmoe@parryfield.com or Kris Morrison at krismorrison@parryfield.com should you require assistance.

Uncertain times require stong leadership from company directors.  We are each adjusting to a new normal of video conferences replacing meetings and realising how much time we previously wasted on travel.  But there are also immediate and difficult questions which directors of companies are faced with as the implications of a nationwide lock down continues.  In this article we want to ask some of those hard questions so that you can proactively begin to prepare for the coming weeks and months.

Do Director duties apply still?

Yes, these continue even in difficult times.  They are outlined in detail in this article but the key ones relate to acting in good faith and in the best interests of the company (section 131) and acting with the care, diligence and skill of a reasonable director (section 137) taking into account:

  • the nature of the company;
  • the nature of the decision;
  • the position of the director; and
  • the nature of responsibilities undertaken by him/her.

The other duty which will be getting a lot more attention, if there is the impact on the economy predicted, is section 135 around reckless trading.  A director must not agree to, cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors. This duty is aimed at preventing conduct by the directors which could jeopardise the company’s solvency. Unlike the best interests duty, the directors’ personal opinion as to the company’s ability to continue trading is irrelevant. Instead, a Court is likely to ask: “Was there something in the financial position of the company which would have alerted an ordinary prudent director to the real possibility that continuing to carry on the business of the company would cause serious loss to the creditors?”.  In the context of COVID-19 this is going to become a lot more relevant to consider.

Key considerations

As well as making sure you are complying with Director Duties it is important to think widely about all the stakeholders of the company rather than just the shareholders.  This includes employees, suppliers, customers – how are each of these groups impacted and what is the flow on effect on the company?  You might want to have an action plan regarding:

  • Employees: How are they doing?  Is clear messaging going out about the status?  How can you help reduce stress and anxiety through eg zoom catchups?
  • Wage subsidy: Will there be a 30% predicted drop in revenue?  If so, explore the subsidy described here.
  • Leases: Have you got one?  Read this article if so as now may be the time to contact your landlord.
  • Bank funding: Talk early with your funder and ensure you know what the position is in relation to any loans you have.  Are there any other funding sources to be exploring?
  • Shareholders: Is it worth considering raising some more capital from them (depends on unique context of your company as to whether that is an option but extra liquidity might not hurt).
  • Contracts: Do any of them have force majeure clauses in them – for your benefit, or not – that might mean these get paused? What impact will that have on your revenue? Have a read of this article for more on this.
  • Overseas suppliers/customers: Is there someone overseas that may have issues continuing due to the shut down that will flow on to impact you?Having considered all these factors does it impact on the viability of the company?  Is there a risk of later realising that the company was trading recklessly?  Can it continue to enter into new obligations if there is uncertainty about future revenue?  Is there some external advice required to make good decisions?

Conclusion

The point of this article and these questions is not to inspire fear it is to get directors thinking about the actual position of their company in light of many complex factors at work right now.  Directors should be asking questions of management – perhaps requesting more frequent updates and meetings – and documenting what their decisions are in minutes so there is a record of what they decide.  We will get through this and strong leadership from Company directors will be vital for organisations to cross the bridge and get to the other side of the crisis.

This article is not a substitute for legal advice and you should consult your lawyer about your specific situation. For any questions, feel free to contact Steven Moe stevenmoe@parryfield.com or Kris Morrison krismorrison@parryfield.com

We live in unprecedented times. In this short guide we have set out key issues which we think Businesses in New Zealand should be focussed on.

We will update this article as we have further information and expand it more.

Key Information

We recommend looking at this site for the latest Government announcements on COVID-19.

Government support

The government has confirmed that this wage scheme and leave scheme apply to businesses (this includes registered charities, non-government organisations, incorporated societies and other entities). These groups can apply if they meet the qualification criteria. We found that this information was the best to refer to but this summary from Deloitte is helpful as well.

Contracts

Consider seeing what they say about “Force Majeure” events – things outside of your control – there may be provisions which help to delay provision of services or goods at this time. Is some renegotiation needed around the terms? Price? Timing?

Governance

We suggest this is a great chance to look back at your purposes and ensure that they are being followed. Why not also check policies and other rules? We also suggest you ask questions as a governing body to ensure that everyone understands the finances and budgets – how will they be affected? Finally, if you are making important decisions then record them in minutes of meetings. It may be that due to physical distancing you will need to adjust how you have meetings – we use Zoom.

Leases

If you have a commercial lease have a look and see if there is an “Emergencies” clause. If you have such a lease it depends what it says – so it is worth checking your agreement with the Landlord. If you have a recent ADLS version Deed of Lease (which is industry standard) then there is a definition of “Emergency” which includes an epidemic. Clause 27.5 then has provision about access to the property in an emergency – see the screen shot – that refers to “a fair proportion of the rent and outgoings shall cease to be payable…” in some circumstances where you are unable to access the premises as a consequence of the emergency. Use that clause as the basis to talk with your Landlord in the coming weeks.
As a side note, if you only ever signed an Agreement to Lease, don’t panic that it doesn’t have that clause, as the Deed of Lease provisions are deemed to be incorporated into the Agreement to Lease as well (if it is an ADLS form) – see clause 4 of the ADLS Agreement to Lease form.

Other issues

Here are some articles from our website that may be worth a look as well on the topics of good governance, electronic signatures, relief against forfeiture, employer issues, director duties and liquidations.

Questions?

This article is not a substitute for legal advice and you should consult your lawyer about your specific situation. For any questions, feel free to contact Steven Moe stevenmoe@parryfield.com or Kris Morrison krismorrison@parryfield.com

New  Zealand’s Companies Act 1993 and common law impose duties and liabilities on the directors of a company.

Who is a director?
Many of the following duties are not limited to those actually on the board of directors. A director can also include “shadow directors” who instruct the directors how to act, and persons who exercise powers of the board by delegation.

Who are duties owed to?
In general, these duties are owed directly to the company, giving it (and not individual shareholders or creditors) the right to sue a director for breach of duty. However, there do exist a number of provisions by which shareholders and creditors may pursue directors – these will be examined at the end of this article.

  1. Duty to Act in Good Faith and in the Best Interests of the Company (s131)

Good Faith
Good faith implies acting with a proper motive – without any malice or dishonesty. It also means avoiding acts which promote a director’s own interests at the expense of the company’s (historically termed “conflicts of interest”).

Acting in the best interests of the company
This is a subjective test – that is, directors must only act in what they perceive to be the best interests of the company – not what an “ordinary” or “reasonable” director might do. This gives directors a certain amount of discretion to use their own business judgment, without fear of every decision being open to scrutiny. Although, the Courts may find section 131 has been breached when a director does not take into account the company’s interests before acting.

Exceptions to best interests rule
If the company is a joint venture company or a wholly (i.e. 100%) owned subsidiary of a parent company, a director may act in the best interests of his or her appointing shareholder or parent company – even if this is not in the company’s best interests. This recognises that these are unique entities – whose operation depends on directors having liberty to carry out the wishes of their (often conflicting) shareholders.

Strait-jacketed?
Given the duty to avoid conflicts of interest, can directors have any interest in a transaction or use any information gained by virtue of their position? The short answer is “yes” – provided they are willing to jump through the fairly arduous hoops of disclosure imposed by the 1993 Act – these will be discussed shortly.

Our advice:
Don’t get too comfortable with the notion that as long as you believe a decision is in the best interests of the company, you’ll be fine. If your decision is one which any director with any appreciation of fiduciary responsibilities would see as being inconceivable, it is likely a Court would view this as a breach of section 131 – despite its subjective appearance. There is also an independent duty on directors to exercise reasonable care and skill – read on ….

  1. Duty to Exercise Powers for a Proper Purpose (s133)

At its simplest, this duty could be said to cover the situation where a director strays beyond the limitations intended for their office and acts out of an ulterior motive. Unfortunately, it seems impossible to define in advance exactly what situations fall within this definition. It may be that it is not until a Court reviews the exercise of a power that it can be determined whether or not that power was exercised for a proper purpose. Often the Courts consider whether section 131 has been breached and then rely on that rationale to determine that the director has also breached section 133. Some examples from case law include where a director has acted for personal purposes, has withdrawn funds to the company and Inland Revenue’s detriment, or has engaged in a Ponzi scheme.

Our advice:
Be aware that this duty is not related to the duty to act in good faith – that is, a director could act in what he or she thought was the best interests of the company, but still be acting for an improper purpose. A clear example of this would be the directors issuing shares solely for the purpose of diluting a particular (and probably troublesome) shareholder’s shareholding. While this may be in the best interests of the company as a whole (and even applauded by the other shareholders), it will nevertheless be an improper motive for issuing shares.

  1. Duty to Comply with Companies Act 1993 and Company Constitution (s134)

It is obvious that by not complying with the Act or the Company Constitution, a director would be acting outside of his or her mandate.

But wait, there’s more …

However, this duty may be more onerous than it first appears. The Act imposes numerous responsibilities on directors, of which failure to discharge may result in criminal liability (discussed later). For example, under section 87(1), a share register must be maintained by the company. Failure to do this would mean that the Act is not being complied with and, for a director, would be a breach of the section 134 duty. This breach will be actionable by the company as against the director, which means that not only does so simple an omission as failure to maintain a share register constitute a criminal offence, it exposes directors to potential civil liability for breach of section 134.

And more …?
Our advice: Make sure you are also aware of obligations under other statutes, such as the Privacy Act, Health & Safety in Employment Act and Resource Management Act… – because if you cause the company to act in contravention of any statute, this would almost certainly amount to acting for an improper purpose or not acting in the best interests of the company.

  1. Reckless Trading (s135)

Don’t be so reckless …

A director must not agree to, cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors. This duty is aimed at preventing conduct by the directors which could jeopardise the company’s solvency. It is not designed to curtail the directors’ ability to take risks – as long as the company is able to bear the loss from complete failure.

Objective Test
Unlike the best interests duty, the directors’ personal opinion as to the company’s ability to continue trading is irrelevant. Instead, a Court is likely to ask: “Was there something in the financial position of the company which would have alerted an ordinary prudent director to the real possibility that continuing to carry on the business of the company would cause serious loss to the creditors?”

Arise from your slumber
The situation of a director who “allows” reckless trading may include the “sleeping director” who has little or no actual knowledge of the company business, but is content to abdicate his or her responsibilities to more active members of the board. This can be especially relevant where spouses are each directors of a company, but only one works in the business.

Our advice:
Make sure you have a sound knowledge of goings on no matter what your level of involvement in the company. If you miss a board meeting, make sure you find out what happened from another director – even obtain a copy of the minutes to ensure no major decision was made – which you might have “allowed” by your absence.

  1. Duty in relation to Obligations (s136)

A director must not agree to the company incurring an obligation unless he or she believes on reasonable grounds when the obligation is incurred that the company will be able to perform the obligation when required to do so.

This will apply to such transactions as the company giving a guarantee.

Cramping their style?

It has been suggested that this duty will prevent directors taking commercial risks. However, as long as the directors’ decision is based on reasonable inquiries, research or information, it is less likely to be scrutinised later.

Our advice: When making a decision of this kind, the board should leave a “paper trail” – detailing not only their decision, but also their reasons. Better still, obtain professional advice. This will go toward showing that you acted on “reasonable grounds”. Also, do your homework early on – note the test is applied “at the time the obligation is incurred” – that is, when the transaction is entered into.

  1. Director’s Duty of Care & Skill (s137)

The Test

Directors are required, when exercising powers or performing duties, to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances, taking into account:

  • the nature of the company;
  • the nature of the decision;
  • the position of the director; and
  • the nature of responsibilities undertaken by him/her.

Therefore, it seems each director is judged on his or her role in each decision made. If a director is appointed to a specific task, he or she may be liable if they do not bring the required skills to that task. However, it appears that a director is not ordinarily supposed to have special skills – so there may be differing levels of skill and care expected from executive and non-executive directors (but note that any difference between these directors applies to this duty only).

Don’t go down these roads …

Examples of the Courts finding directors to have breached this duty include:

  • where they acted before becoming fully acquainted with the company’s affairs.
  • where loans were made to a company connected to a director with no possible benefit to the company.
  • where cheques were signed in blank and the conduct of the business left entirely to another director.
  • where directors unquestionably trusted (subsequently dishonest) employees with the management of the company.

A Higher Standard?

Many people believe that this duty places a greater burden and more stringent standard of care on directors than was previously the case. At the very least, it would seem that shareholders’ greater awareness of a statutory duty of care on directors will lead to higher expectations and increased vigilance of directors’ actions.

Our advice: It is vital to understand that it is no longer acceptable to sit back and let others run the show. It is clearly established that even directors who are scarcely involved in management of the company can still be held liable when financial difficulties arise. Evaluate your position as a director – are you familiar with the ins and outs of the business? Do you read (and understand) the financial accounts? Do you attend board meetings? Do you have a hand in business decision-making? If the answer to these is generally “No”, it may well be that you shouldn’t be a director at all!

  1. Use of Information and Advice (s138)

Relief from Omniscience?

In today’s commercial environment, directors cannot be expected to know everything about their company, or possess all the skills necessary for business decision making (although based on the foregoing, you could be forgiven for thinking otherwise!) Section 138 provides a (limited) form of relief for directors. It entitles directors, in the course of decision making, to rely upon reports, statements and financial data, as well as professional/expert advice given to them by:

  • an employee of the company who is believed by the director (reasonably) to be reliable and competent in the matters concerned – this could be another director.
  • a professional adviser/expert on matters within their competence.
  • another director or committee of directors regarding a specific area of designated authority.

There is a catch: In doing so, directors must act in good faith, make proper inquiry where the circumstances indicate a need for this, and have no knowledge that their reliance on the information is unreasonable.

Our advice: Again, documentation of decisions is the key – whenever you rely on someone else’s advice, record that fact. And don’t just blindly rely on others – as a director, you should be capable of reaching a reasonably informed opinion of the company’s financial capacity. If there are grounds for suspicion arising from another’s advice – act appropriately.

  1. Director’s Interests (ss139-144)

Traditionally, if a director had an interest in a contract made with the company, he or she had to account to the company for any profits they might make (unless the company’s Articles or shareholders permitted otherwise). This was seen as a unduly harsh rule, and has now given way to a more permissive – but also more controlled – regime under the disclosure provisions of the Companies Act 1993.

Cards on the Table
Where a director has (or may obtain) a direct or indirect financial benefit in a transaction, he or she must disclose their interest in the transaction as soon as they become aware of it.

Disclosure is made by way of entry in the “interests register”, which must be kept by the Company. Disclosure is also required to be made to the board.

Avoidance by the Company
A transaction in which a director is interested may be avoided by the company any time within three months after the transaction is disclosed to the shareholders (whether by annual report or otherwise) – unless it is proved that the transaction is for fair value.

Our advice: Err on the side of excess when it comes to disclosure. While failure to disclose an interest in the register doesn’t affect the transaction’s validity, it could open you up to a $10,000 fine or an action from shareholders for breach of duty.

Also, disclose interests to the shareholders early – don’t leave it until the annual report – this could be months away and extend the timeframe in which the transaction can be overturned by the company.

  1. Use of Company Information (s.145)

Pssst! …… (Don’t) Pass it on!
As with director’s interests, directors have traditionally been prohibited from using company property (including confidential information and trade secrets) for their own purposes. However, once again this blanket prohibition seems to have been abandoned in favour of regulating the use of information by directors.

Section 145 of the Act provides that a director who possesses confidential information must not disclose that information to any person, nor make use of it or act on it, subject to the following exceptions:

  • If disclosure is made solely for company purposes.
  • If disclosure is required by law.
  • If:

(a)           The director has entered particulars of the disclosure in the interests register; and

(b)          the board has authorised the director to make disclosure; and

(c)           the disclosure will not prejudice the company.

·         If disclosure is made by a nominee director to his or her appointer, provided this is not prohibited by the Board.

What is confidential information?  It could be anything, but definitely includes trade secrets, technical know-how, lists of customers, internal financial reports, feasibility studies, and specific information concerning ongoing transactions between the company and its clients.

It is important to note that the section does not directly cover the use of company information by a former director. Here, the company would probably need to rely on the common law relating to breach of confidence.

Our advice: While section 145 would seem to provide reasonable protection, if your company’s operation is such that directors are often privy to large amounts of confidential information and/or have outside interests in similar spheres, it may be prudent to have the directors sign a confidentiality/restraint of trade agreement which expressly binds them during and beyond their term of office.

  1. Further Liability

While the above synopsis sets out the primary duties a director must uphold (which, in essence, place the quality and integrity of their decisions under the spotlight), liability for breach of these duties is by no means the only way a director can be called to account. What follows is a whistle-stop tour (or steeple-chase) of further provisions contained in the Companies Act 1993 which could cause a director to stumble:

  • A director owes duties directly to shareholders to supervise the share register, disclose interests in contracts with the company (as discussed above), and disclose any interest they have in share dealings. A breach of these duties entitles a shareholder to bring a personal action against a director (s169).
  • A shareholder could also bring an action to either restrain a director from acting in a manner which breaches the Act or the company constitution (s164), or to force them to act in accordance with these (s170).
  • Directors may be personally liable if a distribution is made to shareholders when the company is insolvent – to the extent that the distribution is not able to be recovered from the shareholders (s56).
  • Directors may be personally liable to liquidators or creditors for the debts of the company if they participate in the management of a company when they have been disqualified (by the Court or the Registrar) from doing so (ss384,386).
  • Directors may be liable to the company if they receive an unauthorised payment or have unauthorised insurance effected – to the extent they are unable to prove these are fair to the company (ss161,162).
  • If, on the liquidation of the company, it appears to the Court that a director has misapplied company money or property, or has been guilty of negligence, default or breach of trust, he or she may be liable to repay or restore the money or property, or contribute an amount to the assets of the company by way of compensation (s301).
    Note that a creditor is entitled to apply for an order under this section and could allege breach of any duty as grounds for an order that money or property be paid directly to the creditor. If a company is in liquidation and the failure by the company to keep proper accounting records has contributed to its inability to pay its debts or impedes an orderly liquidation, a Court can order that any directors or former directors are personally responsible for all or any part of the debts of the company – unless they can show they took reasonable steps to ensure compliance (s300).
  • Criminal Liability: There are over 100 sections of the Act a breach of which can constitute a criminal offence. In almost all of these sections, criminal liability is imposed on the directors personally, in addition to the company (there do exist limited defences relating to reasonableness on the part of directors). Penalties can be up to $10,000 depending on the offence. Far more serious, dishonesty offences can carry up to 5 years imprisonment or a fine of $200,000 (ss373,374).
  • Liability in tort: A director can be liable for a tort (for example, negligence) committed primarily by the company, but through their agency – if they have assumed personal responsibility for their actions.
  • A directors who trades shares using inside information is liable to account to the buyer to the extent that the shares are sold for more or less than their fair value (s149).
  • Directors should also be aware of both the company’s and their own obligations under any other legislation – which also have the potential to fix personal liability on directors. These include, but are not limited to the Financial Reporting Act, Fair Trading Act, Health & Safety in Employment Act, Resource Management Act, Commerce Act, Privacy Act, Human Rights Act, and Building Act.

Conclusions

It will hopefully be apparent by now that the significance and potential consequences of these duties and liabilities are not to be sneezed at. Unfortunately, it seems that at present directors are either largely ignorant of these standards or do not take them sufficiently seriously. Perhaps more unfortunate is that it is usually not until a company fails that the extent of these duties becomes relevant – when a director’s decision is reviewed by the Court.

It is imperative to get things right at the time each decision is made. If you have any doubt as to the wisdom of any decision or act either of your own or your fellow directors, seek legal advice.

Because the implications of these duties are potentially severe, companies are increasingly availing themselves of the indemnity and insurance provisions of the 1993 Act as part of a risk management strategy designed to avoid personal liability on the part of directors.

 

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Should you need any assistance with this, or with any other Commercial matter, please contact Tim Rankin at Parry Field Lawyers (348-8480) timrankin@parryfield.com

The much-anticipated final report of the Tax Working Group (TWG) was released on 21 February and, unsurprisingly, recommended the introduction of a broad-based, realised capital gains tax regime. The Final Report is substantial at two volumes and 206 pages, 94 of which are dedicated to a discussion on a capital gains tax (CGT) regime.

Whilst there are some changes from the Interim Report released last September, the recommendations are substantially the same as those contained in that report. Interestingly, only eight out of eleven of the TWG members support the introduction of a comprehensive CGT regime.

As always, the devil is in the detail and it will take some time for the entire 206 pages to be digested. However, a summary of the recommendations is as follows:

What will be taxed?

  • The following assets (included assets) would be subject to CGT: all forms of land except the family home, shares, intangible property, and business assets. The TWG recommends excluding personal use assets such as cars, boats, jewellery, fine art, collectibles, and other household durables.
  • Only gains arising after “valuation day” would be taxed.
  • Taxpayers would have up to five years to determine the market value of assets as at valuation day. If a valuation is not obtained, a “default rule” would apply. According to prominent Wellington property investor, Troy Bowker, that could impose a $4.5billion compliance cost on affected taxpayers (450,000 small businesses incurring on average $10,000 in valuation costs). The TWG specifically recommend against adopting the Australian approach of only taxing assets acquired after the date of introduction.

When will it be taxed?

  • CGT would apply on a realised basis only but would be subject to a number of concessions/exclusions referred to as “rollover relief”.
  • Rollover relief would apply to all inherited assets, assets donated/gifted to donee organisations (charitable entities), certain involuntary events where the proceeds are invested in a similar replacement asset e.g. an insurance event/natural disaster, a business restructure where there is no change in ownership in substance, small business rollover where proceeds from included assets are reinvested in a replacement business.
  • In terms of gifted assets, rollover relief would apply where the gift is to the person’s spouse, de facto or civil union partner but otherwise would not qualify for relief.
  • CGT will be imposed at the person’s marginal tax rate. The TWG does not recommend an adjustment for inflation or that the tax rate should be discounted (as currently the case in Australia).
  • The cost of an asset including capital improvement can be deducted against sale proceeds to arrive at the taxable capital gain. However, holding costs such as interest or rates will not be claimable against personal use assets.
  • Capital losses should be capable of set-off against both ordinary and capital income i.e. they should not be ring-fenced and claimable against only against capital gains. However, there are several exceptions proposed to this rule – the most notable being that capital losses from personal use assets cannot be claimed against either ordinary income or capital income. Others include losses generated from associated person transactions, where rollover relief is available but the taxpayer chooses not to apply them, losses arising on assets held on valuation date.

Transitional Rules


A number of transitional rules for assets held on valuation date are also proposed including:

  • Flexible and default valuation rules for valuation date assets should be mandated by Inland Revenue.
  • A median rule for assets held on valuation date whereby the “cost” to be deducted from proceeds to determine the capital gain amount will be the middle value of actual cost (including improvements), valuation date value (including improvements), and sale price. The intention is to stop artificially high valuations being adopted at valuation date.
  • Transitional rules are also recommended for immigration/emigration, and where an asset changes use from private to a CGT asset and vice versa.

Who is taxed?

Consistent with our existing tax regime, a New Zealand tax resident will be subject to CGT on worldwide assets. Non-residents will be subject to CGT only on New Zealand-sourced capital gains.

Company Matters

There is some discussion dedicated to the potential for double taxation and double deductions for gains and losses in the corporate context. For example, a company sells an asset and derives a capital gain on which it is taxed. A shareholder then decides to sell their shares before that capital gain has been distributed. Inherent in the value of the shares is the capital gain derived by the company. This potentially leads to the same gain effectively being taxed twice i.e the company is taxed on realisation and the shareholder is taxed again on the same underlying gain via the increased share value.

The TWG concludes the market will take care of this issue in terms of widely-held entities and in relation to closely held entities, these issues can be managed by distributing said gains before the share sale.

Imputation continuity rules

Of particular interest is the suggestion that the continuity rules for imputation credits be removed (these rules currently require the same shareholders to hold at least 66% of the shares in a company in order to carry forward imputation credits).

Liquidation

The TWG acknowledges that the rules dealing with distributions from a company on wind-up will need to be modified to ensure pre-CGT gains are not subject to tax on final distribution.

Foreign shares

The current regime dealing with interests in foreign investment funds (FIF) is to be retained with some possible refinement to the ability for individuals and trust taxpayers to switch between the fair dividend rate and comparative value methods. However, CGT will be imposed on foreign shares which are not currently subject to the FIF regime. This includes holdings of less than 10% in Australian resident listed companies, greater than 10% holdings in Australian resident companies, and a foreign share portfolio with a cost of less than $50,000.

There is also some discussion around portfolio investment entities including KiwiSaver funds. At a very general level, the proposal is that these entities will also be subject to CGT on investments not dealt with under the FIF regime.

The Dissenting Views in the TWG

Robin Oliver, Joanne Hodge and Kirk Hope all disagree with the TWG’s recommendation to introduce a comprehensive CGT regime. Their collective view is that the costs of introducing a CGT regime as proposed by the TWG would clearly outweigh the benefits. Such a regime would impose efficiency, compliance and administrative costs that would not be outweighed by the revenue collected. They also have concerns over the timetable to introduce the rules.

They suggest an incremental extension of the tax base over time i.e. extending the tax base on an asset-by-asset basis. In their view, an extension to the taxation of residential rental properties is the most obvious starting point.

Closing Comments

A lot will be said over the coming months about the proposed regime and, if the government is to get it across the line, we may find some areas are watered down, especially the applicable tax rate.

There is also one obvious recommendation that the TWG has overlooked entirely and it is this: we recommend Jacinda wanders down the hallway and has a quiet word with Winston to determine whether he is in support of a broad-based CGT regime. If not, the Interim and Final Reports will make for useful doorstops but that’s about all. A quick discussion could save us all a great deal of time and effort debating this issue, not to mention millions of dollars of taxpayer funds drafting legislation and undertaking the consultation process.

Used by permission, Copyright of NZ Law Limited, 2019

At the start of last year, we were gearing up for the introduction of the General Data Protection Regulations (GDPR). The GDPR is the widest reaching, most stringent set of data protection laws the international platform has seen to date. Nine months later, we are starting to see its impact.

The consequences for non-compliance have been varied. Under the GDPR, the highest sanctions can see a fine of up to €20 million, or 4% of global annual turnover, whichever is higher. A new report by international firm DLA Piper counted just below 60,000 GDPR data breaches reported since its introduction. Despite these numbers, less than 100 fines have been issued by regulators. The DLA Piper researchers attributed this low response with regulators still finding their feet in their heightened supervision roles. Google has been given the highest fine so far at €50 million. At the lower end, an Austrian betting shop was fined €4,800 plus legal costs when their security camera trained on the entrance also captured the footpath outside. It was held in breach of the GDPR as monitoring of public space is not allowed.

Despite being EU legislation, the GDPR can still impact businesses in New Zealand. You will likely need to comply with the GDPR if you:
– have a branch or subsidiary in the EU;
– monitor the behaviour of EU residents (e.g. monitor how many EU customers visit your website); or
– sell goods or services to people who live in the EU.

While there are yet to be any fines outside the EU, NZ companies should not take a relaxed approach to GDPR compliance. As the Regulators establish themselves, we may see more attention turned towards businesses outside the EU.

We would encourage you to get in contact with us if your company doesn’t have a privacy policy or if you’re worried your current policy won’t meet the requirements. Parry Field Lawyers has created a privacy policy template which is GDPR compliant.

Even if you don’t deal with EU customers, it is important to have a robust privacy policy in place. Contact Steven Moe at StevenMoe@ParryField.com or Aislinn Molloy at AislinnMolloy@ParryField.com to see how we can help.

Under the Financial Services Providers (Registration and Dispute Resolution) Act 2008, everyone who provides, or offers to provide, a financial service in New Zealand or from New Zealand to other countries must register as an FSP. Importantly, before you offer your financial services you must be registered.

There is a simple straightforward application process for registration. This can be found online on the website of the Ministry of Business, Innovation and Employment.

Firstly, the application process depends on what kind of FSP you are. There are three different types depending on your business and the services you will provide – an individual; an entity already registered via the Companies Office; or another entity or body.

Applying as an individual:

There is basic information which you will have to include the application such as your full legal name, date of birth, residential and contact address, your business address and any trading names you use.

Applying as a business already on a Companies Office register:

You will have to provide your company or entity’s name, the Companies Office number or its New Zealand Business Number. If you do not know what this is, you can search for it via the Companies Register. Furthermore, include any trading names you use, your business and contact address and the basic details on your directors and other controlling owners and managers.

Applying as another entity or body:

The basic information you will have to provide is about your business, such as its legal and trading names, the country of origin, the business and communication address and also an email address. You will also have to provide the basic details on your directors and other controlling owners and managers.

For all applications:

Firstly, in completing this process, whatever kind of FSP you are, you will have to provide information about your business and the services it will provide. In the form you fill out online there are a list of services. You would select all the ones that you intend to provide upon registration. This is something that needs to be kept up to date as well. The services that you need to declare can be found under section 5 of the Financial Service Providers (Registration and Dispute Resolution) Act 2008.

Secondly, every individual FSP and those people in charge will have to undergo a criminal history check.

If you are applying to the Financial Markets Authority (FMA), at the same time, to be an Authorised Financial Advisor (AFA), there is additional information to prepare. (https://fsp-register.companiesoffice.govt.nz/help-centre/applying-to-provide-licensed-services/applying-to-be-an-afa/)

When registering as a FSP there are transaction fees to pay:

○ Application fee, incl. GST: $345
○ Criminal history check fee per person, incl. GST: $40.25
○ FMA levy, incl. GST: $529
○ TOTAL: $914.25

Furthermore, after you register you have to pay fees once you’ve completed your annual confirmation:

○ The Companies Office Fee, incl. GST: $75

Alongside this, you will pay levies to the Financial Markets Authority (FMA).

○ The amount of levies you pay depends on your class of service provider and the services you provide.
○ Levies are listed under Schedule 2 of the Financial Markets Authority (Levies) Regulations 2012.

This online process is efficient and easy and should not take up too much of your time.

Please note that this is not a substitute for legal advice and you should speak to your lawyer about your specific situation. Should you need any assistance with this, or with any other Commercial matters, please contact Kris Morrison or Steven Moe at Parry Field Lawyers (+64 3 348 8480).