Governance - Parry Field Lawyers

The Supreme Court has recently decided the case of Yan v Mainzeal Property and Construction Limited which has direct implications for company directors. What can directors learn from this case and how will it affect how directors undertake their duties? We set out the key facts and principles so that you can stay safe.

Mainzeal was a property focussed company that went into liquidation owing approximately $110 million to creditors. As the Board was chaired by a former Prime Minister it has gotten a lot of attention. There were five directors and four were held liable for breaches.

This case primarily looked at directors’ duties under sections 135 and 136 of the Companies Act 1993. These sections recognise creditors interests that are to be considered by directors where a company is insolvent or near insolvent.[1] Section 135 provides that a director must not carry on a company’s business in a manner likely to create substantial risk of loss to its creditors. Section 136 outlines the duty of a director not to agree to incurring obligations unless they reasonably believe it will be able to be performed on time.

The Court upheld the Court of Appeals finding that the directors had breached their duties under these sections and compensation was granted under s 136 for new debt incurred but not under s 135 as net deterioration to creditors was not proved.[2]

The Supreme Court summarises the implications for directors of their approach to ss 135 and 136 liability. Three key takeaways for directors from this case are:

Don’t rely on assurances
Get advice early
Know your duties

1. Don’t rely on assurances

Mainzeal had been balance sheet insolvent for years yet continued to trade because its directors primarily relied on assurances of support from companies it was associated with.[3] One company provided a formal letter of support, otherwise known as a “letter of comfort”, while other assurances were less formal.[4] However, these ‘assurances’ were far from sure and critically they were not legally enforceable.

The Supreme Court stated that where assurances are not legally or practically enforceable and not honoured, relying on them will raise questions as to the reasonableness of doing so.[5] In this way it may be found that relying on such assurances is unreasonable and may result in a breach of directors’ duties which may also lead to potential liability.

Key point: Assurances should be documented and legally binding.

2. Get advice early

The Court does consider this when looking at the actions a director took. Directors should seek professional or expert advice early and from sources that are independent from the company. This can help directors be sure of their duties and how to avoid potential breaches, and in turn avoid personal liability. It means they can squarely address whether there are potential risks of loss to creditors or doubt as to whether it is reasonable to believe that obligations incurred will be able to be honoured.[6] By engaging external advice early, directors allow themselves reasonable time decide the course of action they should take.[7]

Section 138 of the Companies Act 1993 specifically allows directors to rely on such advice where they act in good faith, make proper inquiries where circumstances require it and have no knowledge that relying on the advice is unwarranted.[8] Directors should ascertain whether the relevant risks can be avoided or a plan for continued trading can be used to avoid the serious loss or creditors and meet the obligations agreed to.

Directors that do this will be appropriately considering creditors interests and it may help prevent personal liability. Furthermore, the courts take into consideration whether directors obtained advice when determining the reasonableness of a director’s actions.[9]

We help directors stay safe by understanding their duties. Check out our free guides or arrange a conversation with one of our team on the support we can provide you.

Key point: If you are wondering about getting advice, that means you probably should.

3. Know your duties

Governance is all about continual learning. While the concept of limited liability protects directors from some liability it does not protect them from their breach of duties. All the more reason for directors to know their duties and learn how to effectively discharge these duties.

This case outlines some of the duties that directors should be aware of. But they are not the only ones. Directors are required to exercise the care, diligence and skill a reasonable director would exercise in the same circumstances.[10] To do this, they need to continue to monitor the company’s performance and prospects and must not carry on trading in a way that creates a likelihood of substantial risk of loss to the company’s creditors.

[11] This is objectively assessed and directors are at fault if they allow the company to keep trading when they recognised this risk or where they would have recognised it if they had acted reasonably and diligently.[12] Further, directors should not take on new obligations without measures in place to ensure they will be met or without the belief on reasonable grounds that they will be honoured.[13]

If you are a director it is vital to ensure you know what duties who owe to the company, shareholders and creditors in order to avoid breaching them and finding yourself personally liable for it.

Key point: Keep learning individually and as a board about your duties.

Mainzeal will be talked about for a long time to come and it perhaps signals that there is a broader need for reform of the Companies Act. In the meantime there are some practical steps which you can take as a director to ensure you keep on the straight and narrow and avoid liability if you are involved in governance of a company which is getting close to insolvency.

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If you have any further queries please do not hesitate to contact one of our experts at Parry Field Lawyers.

This article is general in nature and is not a substitute for legal advice. You should talk to a lawyer about your specific situation. Reproduction is permitted with prior approval and credit being given back to the source.

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[1] Yan v Mainzeal Property and Construction Limited (in Liq) [2023] NZSC 113 at [359].

[2] Yan v Mainzeal Property and Construction Limited (in Liq) at [371]-[375].

[3] Yan v Mainzeal Property and Construction Limited (in Liq) at [2].

[4] Yan v Mainzeal Property and Construction Limited (in Liq) at [36]-[37] and [42].

[5] Yan v Mainzeal Property and Construction Limited (in Liq) at [363].

[6] Yan v Mainzeal Property and Construction Limited (in Liq) at [270].

[7] Yan v Mainzeal Property and Construction Limited (in Liq) at [271].

[8] Companies Act 1993, s 138(2).

[9] Yan v Mainzeal Property and Construction Limited (in Liq) at [273].

[10] Companies Act 1993, s 137.

[11] Yan v Mainzeal Property and Construction Limited (in Liq) at [270] and [360].

[12] Yan v Mainzeal Property and Construction Limited (in Liq) at [360].

[13] Yan v Mainzeal Property and Construction Limited (in Liq) at [273] and [369].

The term ‘director’ usually refers to people formally appointed to a Board. However, some people who are not formally appointed may operate as ‘deemed directors’ or ‘shadow directors’. They are increasingly likely to be treated by the law in the same way as formally appointed directors.

Justice Millett in a well-known case said a ‘de facto’ director “… is one who claims to act and purports to act as a director, although not validly appointed as such. A shadow director, by contrast, does not claim or purport to act as a director. On the contrary, he claims not to be a director. He lurks in the shadows, sheltering behind others who, he claims are the only directors of the company to the exclusion of himself.”[1]

Justice Millett’s description is perhaps a little cynical. Some shadow directors may be trying to avoid the accountability that attaches overtly to appointed directors, while others may be quite open about the influence they have on directors and boards.

What does the Companies Act say? What matters is that de facto and shadow directors are captured in the Companies Act definition of ‘director’ as a person in accordance with who directors or instructions the board of the company may be required or is accustomed to act. This means that whether or not they regard themselves as directors, these ‘deemed directors’ may be held accountable as though they were directors for any breaches.

Who might this capture? Looking at the definition, whether or not a board is “required or accustomed to act” for a deemed director is a matter of fact. The court will look at any evidence that shows a pattern of behaviour that amounts to directors being “accustomed to acting” on a deemed director’s instruction.

One legal commentator has suggested that the statutory wording of “required to” might extend the accountability net to include people who can be shown to have exercised control over the board even without a pattern of behaviour,[2] although this has not yet been tested in court.

An example in practice could be a large shareholder who is not a director but who behind the scenes is directly what the Board does.

Key points to note:

Parliament implemented this definition intentionally. It makes sense that if deemed directors have been instrumental in action or inaction that breaches directors’ duties, they too should be held accountable; perhaps even more so if they did this to avoid attention and liability.
Boards often rely on the professional advice from lawyers or accountants. It is important that relationships with advisors are purely advisory in nature and that directors or boards are not controlled or directed by the advisors.
If you are a shadow director, or your company has a relationship likely to be deemed a shadow director, be aware of the implications. One question to ask might be whether or not shareholders are aware of the shadow director, and if not, why not. Should the person just be appointed?

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[1] Re Hydrodan (Corby) Ltd [1994] 2 BCLC 180 Ch, at 183.

[2] Taylor Lynn “Expanding the pool of defendant directors in a corporate insolvency: the de facto directors, shadow directors and other categories of deemed directors” New Zealand Business Law Quarterly 16(2) Jun 2010:203.

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If you have any further queries please do not hesitate to contact one of our experts at Parry Field Lawyers- stevenmoe@parryfield.com, yangsu@parryfield.com, sophietremewan@parryfield.com, or annemariemora@parryfield.com

Business can be complicated but it doesn’t have to be. We have helped thousands of clients and know about the key legal areas that will affect you and have just released our fully revised and updated “Doing Business in New Zealand” free handbook. You can download it here.

New Zealand consistently ranks as one of the most business-friendly nations in the world. Given this appealing status and the interest we receive both from local and international investors, as well as form businesses and entrepreneurs, we produced the “Doing Business in New Zealand” handbook a few years ago and now have fully updated it. It is intended to introduce and provide information for those who may be unfamiliar with how business is done here. The handbook provides introduction on business structures, investment rules, employment, disputes, property, intellectual property, immigration, privacy and social enterprise, just to name a few examples.

If you have further enquires please contact Steven Moe at stevenmoe@parryfield.com or Kris Morrison at krismorrison@parryfield.com.

Be sure to check out our other free guides too, such as Startups: Legal Toolkit and Social Enterprises in New Zealand: A Legal Handbook. We also provide free templates for resolutions, Non Disclosure Agreements and other resources on our site as well as many articles on key topics you should know about.

There is often confusion over Health and Safety – the rules have been around for a while now but we still get some common questions. Below we set out some of the key points to consider to ensure compliance around volunteers. Check out our other guidance on these topics as well.

Is your organisation a PCBU?

Under the The Health and Safety at Work Act 2015, a PCBU has the primary duty to ensure the health and safety of its workers and others, so far as is reasonably practicable.

Reasonably practicable means that “which is, or was, at a particular time, reasonably able to be done in relation to ensuring health and safety.” A PCBU is not expected to guarantee the health of safety of their workers but they must do what can reasonably be done to ensure health and safety. Factors that will affect what is reasonably able to be done include:

The hazards and risks associated with the work and the likelihood of the hazard or risk occurring;
The severity of the injury or harm to health that could result from the hazard or risk;
What the person knows or reasonably should know about the hazard or risk and the ways of eliminating or minimising it;
What can be done to eliminate or minimise the risks and how available and suitable these risk controls may be;
The cost associated with eliminating or minimising the risk, including whether it is grossly disproportionate to the risk.

What about Volunteer organisations?

Section 17 of the Act states a “volunteer association” is not a PCBU. The Act defines a volunteer association as “a group of volunteers (whether incorporated or unincorporated) working together for 1 or more community purposes where none of the volunteers, whether alone or jointly with any other volunteers, employs any person to carry out work for the volunteer association”.

If your organisation has no employees then it will be known as a volunteer association under the Act. As a volunteer association your organisation would not be a PCBU and therefore the Act would not apply to your organisation. However, frequently this exemption would not apply to organisations.

If your organisation has one or more employees then it is likely it will be a PCBU and thus the Act will apply.

If your organisation is a PCBU

If your organisation is a PCBU, it will have a duty to ensure the health and safety of others so far as is reasonably practicable.

So what about Volunteer officers?

Officers have a duty to exercise due diligence to ensure the PCBU complies with its duties and obligations under the Act. In exercising due diligence, officers must take reasonable steps to:

Know about work health and safety matters;
Gain an understanding of the operations of the PCBU and the hazards and risks associated with those operations;
Ensure the PCBU has appropriate resources and processes to eliminate or minimise risks;
Ensure the PCBU receives information about incidents, hazards and risks;
Ensure there are processes for the PCBU to comply with the Act.

Volunteer workers

Under the Act a “volunteer worker” is a volunteer who carries out work in any capacity for a PCBU on a regular basis, with the PCBU’s knowledge and consent and is integral to the PCBU’s operations. A PCBU would owe a duty to ensure, so far as is reasonable practicable, the health and safety of volunteer workers.

The volunteer worker would also have duties under the Act. While at work they must:

Take reasonable care for his or her own health and safety;
Take reasonable care that his or her acts or omissions do not adversely affect the health and safety of other persons;
Comply, as far as the worker is reasonably able, with any reasonable instruction that is given by the PCBU to allow the PCBU to comply with the act or regulations; and
Co-operate with any reasonable policy or procedure of the PCBU relating to health or safety at the workplace that has been notified to workers.

“While at work” is not defined but likely means while at the workplace or at an event run by the PCBU.

Casual volunteers

A volunteer is not a “volunteer worker” if their voluntary work includes:

Participating in a fund-raising activity;
Assisting with sports or recreation for an educational institute, sports club or recreation club;
Assisting with activities for an educational institution outside the premises of the educational institution; or
Providing care for another person in the volunteer’s home.

Even though this volunteer would not be a volunteer worker, the PCBU would still have a duty to them to ensure their health and safety is not put at risk from the PCBU’s work.

The casual volunteer would not have duties under the Act.

If your organisation is a PCBU and something goes wrong the penalties can be high. It is therefore very important that you are aware of whether your organisation is a PCBU or not. In some cases this may be unclear. We would be more than happy to talk with you about your particular situation to help you determine whether or not you are a PCBU.

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

There is often confusion over Health and Safety – the rules have been around for a while now but we still get some common questions. Below we set out some of the key points to consider to ensure compliance. Check out our other guidance on these topics as well.

Top 10 things to know

Be aware
- The Health and Safety at Work Act 2015 has been in force for a few years and it has introduced greater accountability for Health & Safety for your organisation if you employ staff.
Are you a ‘PCBU’?
- If you are a “Person Conducting a Business or Undertaking” then you are a PCBU. A PCBU can operate in a voluntary way without primarily being set up to make money. It has the primary duty of care in a workplace. See below for more on this.
Officers of PCBUs
- Directors, managers and leaders of the PCBU also face significant penalties under the Act for failing to exercise due diligence in ensuring the PCBU carries out its duties.
To start: Identify risks
- Ensure all risks and hazards are in your organisation are identified. Start by looking at the facility, entry and exit points, stage areas, equipment used, the people, the weather … what are the risks where you are?
Control & Eliminate
- Put procedures in place to control or eliminate risks to health and safety so far as is reasonably practicable.
Prepare
- Maintain a health and safety policy with the help of your employees. Put it into action and ensure your employees and contractors are aware of it and follow it – don’t just hide it in a drawer!
Tailor your documents
- Customise your documents so they are practical for you. One size does not fit all. It may be that a consultant is worth hiring to help you prepare documentation as well.
Check your visitors
- If other contractors or other entities come on to your property you must ensure they have proper health and safety procedures in place and provide you with a copy. Ask for it and check it!
Standing item
- It is good practice to have this topic as a standing item at your board meetings.
Remember the penalties are high
- Fines of up to $3 million and imprisonment of up to 5 years can be imposed. “She’ll be right” is no longer OK. Think about these issues now, not later

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

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 directors 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 were filed by the liquidators and former directors.

In 2021 the Court of Appeal found that the directors had breached s 135 of the Act, which exposed the company’s creditors to a substantial risk of serious loss. However, that loss did not materialise and the court therefore no compensation should be payable by the directors.

The court also found the directors had breached s 136 of the Act when they entered into four significant construction contracts. The matter was remitted to the High Court to determine the compensation payable. The former directors are seeking to overturn the decision and the matter is currently before the Supreme Court.

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?

A recent United Kingdom case of interest

The Supreme Court of the United Kingdom ruled for the first time in October 2022 on what triggers the directors’ duty to have regard for creditors’ interests ahead of shareholders interests (that is the company). The case is BTI 2014 LLC v Sequana SA and others.

Conclusion

The final outcome of Mainzeal is outstanding. However, what can be taken away from this case is the importance of the obligations and duties directors have to a company and creditors. 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.

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.

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 ….

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.

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.

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.

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.

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!

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.

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.

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

· 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.

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

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).

If you are in start-up mode then you have plenty to think about – so when it comes to setting up your Company you may be wondering what is essential and what is not? In this article we talk about a Constitution and explain what it is and the role it can play for your Company.

To set up a Company the key things you need are a Shareholder and Director (needs to be NZ resident or a director in an Australian company). A Constitution is not legally essential in order to set up a Company but they are very common. This is because they can alter the ‘default’ position under the Companies Act. Without a Constitution the Companies Act provisions apply to your new venture. That may be fine in some simple situations where there is only one shareholder and director but in the usual scenario of multiple people involved it can pay to be specific and customise how you want the rules to apply.

It is worth remembering that because a Constitution is a public document it also allows for transparency in case someone wants to look it up on the Companies Office website (as opposed to a Shareholders’ Agreement which is a private document). More on the Shareholders’ Agreement and what that is another time.

So turning to what a Constitution would typically cover, they deal with how the Company will run in relation to matters such as:

• Setting out clearly the purpose of the Company;
• Information regarding the Shares such as how they are issued and transferred and whether there are any restrictions on selling or transferring shares;
• About distributions and when dividends will be paid and the process;
• Regarding Directors such as the number of directors, how they are appointed and how they resign or are removed;
• Meetings and what will make up quorums of the Board or Shareholder meetings; and
• What happens if the Company is wound up and ceases to trade.

While it may seem like having a Constitution is not necessary if you will be the sole Director and sole Shareholder it is important to think long term – how about in 2 years when you want to bring in an investor? It is likely that having a framework to show that covers off the key points about how the Company operates will be helpful. We would be happy to talk through some of the issues involved as we deal with start-ups most days of the week.

Recently we prepared a guide called “The Start-ups Legal Toolkit” which is a free ebook – contact us if you would like a copy. We also have resources on our “Innovate” website with templates and articles and guides there.

Contacts: Steven Moe – stevenmoe@parryfield.com and Kris Morrison – krismorrison@parryfield.com

Applying as an individual:

Applying as a business already on a Companies Office register:

Applying as another entity or body:

For all applications:

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

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