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

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 Kris Morrison at KrisMorrison@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).

New Zealand has passed a law called the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (“the AML/CFT law” for short). The purpose of the law reflects New Zealand’s commitment to the international initiative to counter the impact that criminal activity has on people and economies within the global community.

Recent changes to the AML/CFT Act mean that from 1 July 2018 lawyers must comply with its requirements. Lawyers must do a number of things to help combat money laundering and terrorist financing, and to help Police bring the criminals who do it to justice. The AML/CFT law does this because the services law firms and other professionals offer may be attractive to those involved in criminal activity.

The law says that law firms and other professionals must assess the risk they may face from the actions of money launderers and people who finance terrorism and must identify potentially suspicious activity.

To make that assessment, lawyers must obtain and verify information from prospective and existing clients about a range of things. This is part of what the AML/CFT law calls “customer due diligence”.

Customer Due Diligence Requirements

Customer due diligence requires a law firm to undertake certain background checks before providing services to clients or customers. Lawyers must take reasonable steps to make sure the information they receive from clients is correct, and so they need to ask for documents that show this.
We will need to obtain and verify certain information from you to meet these legal requirements. This information includes:

your full name; and
your date of birth; and
your address.

To confirm these details, documents such as your driver’s licence or your birth certificate, and documents that show your address – such as a current bank statement – will be required.
If you are seeing us about company or trust business, we will need information about the company or trust including the people associated with it (such as directors and shareholders, trustees and beneficiaries).

We may also need to ask you for further information. We will need to ask you about the nature and purpose of the proposed work you are asking us to do for you. Information confirming the source of funds for a transaction may also be necessary to meet the legal requirements.

If you cannot provide the Required Information

If we are not able to obtain the required information from you, it is likely we will not be able to act for you. Because the law applies to everyone, we need to ask for the information even if you have been a client of ours for a long time.

Before we start working for you, we will let you know what information we need, and what documents you need to show us and let us photocopy.

Please contact the lawyer who will be undertaking your work, if you have any queries or concerns.

The European Union (EU) will soon have new rules that are likely to affect the privacy policies of businesses around the world. They relate to the collection of data from citizens of EU countries, and so can affect businesses even as far away as New Zealand. The EU General Data Protection Regulation (known as the GDPR – more info here) has now come into force as of 25 May 2018.

There are three key ways that it could affect your business which you should be thinking through now.

1. Assessing to what extent it will affect you

To answer this you need to think through questions like this:

do you market to and target EU residents via website? Just having it accessible to them may not be enough – do you actively target EU residents to help those in the EU order tours or trips via your website such as offering the website in languages of the EU (beyond English)?
what “personal” data do you collect about users/customers e.g. names, gender, dates of birth, phone, credit card information, addresses, emails etc.
do you transfer data to the EU for example to any agents who act on your behalf there or do you have an “EU representative” or any physical presence at all?
does anyone else store your data on servers offshore or is it all in New Zealand?

2. Reviewing your documents

In light of the answers above, the key one to review is your privacy policy and it is important to check what it says and if it needs updating to reflect best practice. In addition, it is good to look at any consent forms (or places clients click) to check that they are widely enough drafted to give consent to use of their information.

When looking at your privacy policy some key questions to ask are:
What exactly is being collected?
Which entity is collecting the data?
What is the basis for receiving and for processing the data?
Whether or not the data will be shared with third parties?
How long will the data be stored for?
How is the information collected going to be used?
What rights does the person who submitted the information have to e.g. access it – and how?
What the process for a complaint is?

3. Documenting how you comply

This is both an internal record but also could be used if you were ever asked to show how you are complying. It would document the above two points clearly to explain how compliance with the new rules is ensured.

You may want to also designate a person or group to lead the effort within the business. A “Data Protection Officer” could help lead the way in this regard. They may want to prepare a “Data Protection Policy” which can also be used to educate the businesses’ senior decision makers about the GDPR’s new risk-based compliance approach, and the potential effects of non-compliance.

We are able to assist companies with a review of their privacy policies in light of the changes in the EU. While it may seem amazing that a jurisdiction so far away could impact us this is likely to be an increasing trend as we move into even more of a global economy where countries and regions look to protect the data of their citizens. This focus is highlighted by reports of the improper use of data by companies harvesting that information to use in elections. If your answers to any of the questions above indicate a link with the EU then now is the time to take action.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Please contact Steven Moe stevenmoe@parryfield.com at Parry Field Lawyers (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

We have all come across disclaimers of some sort. Whether a ‘use at own risk’, ‘don’t try this at home’ or ‘check with your doctor/lawyer before acting upon this information’, the concept isn’t new to us. Yet how much can we really rely on these? At what point can people disclaim their own liability, and when do they have to take responsibility for their actions and advice?

Where do you start?

A core starting point begins with section 9 of the Fair Trading Act 1986 which disallows anyone in trade, from engaging in conduct which is misleading or deceptive or likely to mislead or deceive. If someone can show that they merely passed on the information, with no reason to believe that it was misleading or deceptive, then such a disclaimer may be relied upon.

What are some examples?

In the case of Goldsboro v Walker, Mr Oborn wished to buy a motel. He was initially declined but he tried again, but named his mother-in-law as the purchaser, and forged her signature. His solicitor, Mr Fleming, sent the agreement to the solicitors, but Mr Oborn never completed the purchase. In the Court of Appeal, Mr Oborn was found to be in breach of section 9 as he was not merely passing on the information, but represented that he was acting for the mother-in-law. It did not matter that he thought the assertion to be true.

What if you just “convey” information?

This is where the concept of passing over information comes into play. The case law suggests that if someone clearly communicates that the information they are giving has not been assessed by them, but is merely passed on, they can exclude their liability.

The Supreme Court in Red Eagle Corporation Ltd has emphasised that unless it is clear that the information has been passed on from another source, the conveyor takes the risk that the information will be understood to be personal knowledge. Informing the recipient gives them the opportunity to seek further advice and information.

Conveyors should be careful not to get involved in the information if they wish to keep the safety of the disclaimer. In Watson v Gilbert, despite putting a disclaimer in the financial information, the defendant was held to be more than a mere provider of information as he introduced the plaintiff to the investment programme and encouraged the investment.

What does that mean for us?

If you are receiving information that comes with a disclaimer, you will generally have to accept that they have distanced themselves from liability. It will be your responsibility to do further research. However if they haven’t clearly explained that the information they are giving to you has been sourced from elsewhere, and that they haven’t been involved with it i.e. edited/added to the words, included the words in their own pamphlets etc., then you may be able to consider it as personal knowledge. If the information turns out to be incorrect, then you may be able to make a claim against them.

It is also worth keeping in mind that there may be specific rules that apply to you based on the type of industry you are in. For example, Real Estate Agents are subject to rules around their conduct and it is difficult for them exclude those professional duties. If you are uncertain about what applies and what you can exclude by way of a disclaimer then we would be happy to discuss with you to clarify.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Please contact Steven Moe at Parry Field Lawyers (348-8480) stevenmoe@parryfield.com

Relief Against Forfeiture

Under section 261 of the Property Law Act 2007 (“PLA”), where a party has received notice of refusal to renew a lease, they may apply to the Court for relief under section 264 of the PLA. Applications must be made within 3 months of the lessee receiving notice of the refusal to renew the lease.

Section 264 of the PLA allows the Court to make an order which extends or renews the lease. The Court may also require the lessor to enter into a new lease with the lessee. Expenses, damages and compensation may also be awarded by the Court in respect of the above orders.

If the lessor has already leased the premises to someone else, or made a disposition which an order under section 264 would prejudice, the Court may still make an order under section 264; however, it may also choose to cancel or postpone the new estate or interest belonging to the third party, and assess and order damages or compensation. This may be payable by either the lessor or the lessee individually, or by them both jointly.

When considering whether to grant a renewal of the lease, the Court will take 7 factors into account:

Reasons for the failure to give notice – e.g. whether the failure to renew was inadvertent;
Whether the cause of the default was due to any action of the landlord;
The lessee’s conduct, in particular whether it has complied with all conditions/covenants and has been a good tenant;
The prejudice to the lessee if the relief is not granted;
The prejudice to the lessor if the relief is not granted;
The lessor’s motivation for the refusal to renew and understanding of the lessee’s intentions; and
The interests of third parties and how they might be affected by any order.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation.

Contact Kris Morrison at krismorrison@parryfield.com

What is Copyright?

Copyright is the set of legal rights given to the creator/owner of an original work. It prevents other people from doing certain restricted acts in relation to a copyright work without the permission of the copyright owner. These restricted acts include (among others) the right to:

Copy the work;
Issue copies of the work to the public by sale or otherwise;
Perform, play or show the work in public;
Communicate the work to the public;
Adapt the work; and
Do any of the above in relation to any adaptation of the work.

There is no requirement to assert or register copyright in New Zealand. Copyright recognition in New Zealand arises automatically in various kinds of works if:

The work is original; and
The author is domiciled in New Zealand or in a prescribed foreign country or is a citizen or resident of New Zealand or of a prescribed foreign country

Who Owns Copyright?

The Crown is the first owner of any copyright in work made by a person employed or engaged by the Crown under a contract of service, a contract of apprenticeship, or a contract for services.
Subject to Crown ownership, and unless otherwise agreed, in most cases the author is the first owner of the copyright in a literary work.

However, unless otherwise agreed:

if an employee makes a literary or artistic work in the course of employment, the employer owns the copyright; and
if a person commissions and pays or agrees to pay for the taking of a photograph or the making of a computer program, painting, drawing, diagram, map, chart, plan, engraving, model, sculpture, film, or sound recording, and the work is made in pursuance of that commission, the commissioning person owns the copyright.

Attribution

The author of a literary, dramatic, musical, or artistic work that is a copyright work has the right to be identified as the author of the work whenever the work is published or communicated to the public (section 94). The right to be identified as the author is not infringed unless the author has asserted the right be identified as author (section 96).

Use of Third Party Content

Where a third party owns copyright in content, you will not be entitled to copy or adapt that content or a substantial part of it without the permission of the copyright owner or unless the copying or adaptation can be justified under an exception.

What is a Substantial Part?

What constitutes a substantial part of a copyright work is a question of ‘fact and degree’. The quality or importance of what has been taken is much more significant than the quantity. Copying a part of a copyright work that by itself has no originality will not normally be copying a substantial part of the copyright work.
Copyright protection is not focused on originality of ideas but on originality of expression. The importance of the copied part to the original copyright work as a whole is assessed to determine whether it forms a substantial part of the original copyright work.
Originality tends to lie in the detail with which the basic idea is presented. The greater the originality, the greater the protection that copyright law will afford it.

Objective Similarity

Even if another copyright work has been copied, the copyright won’t necessarily have been infringed unless the copy is objectively similar to the original. It is possible to take underlying ideas and concepts that are expressed in a copyright work and express those ideas in a significantly different way which therefore does not infringe copyright.

There is limited clear case law, though, on what counts as objective similarity. In one case, the Judge said ‘a copy is a copy if it looks like a copy’.

Causal Connection

It is also necessary to show that the infringing work was actually copied directly or indirectly from the original copyright work.

Altered Copying

Taking the ideas expressed in a copyright work and expressing those ideas in a different words and in a different format may produce new content that is not causally connected with or objectively similar to the original work.
However, copyright will still be infringed if the altered copy has ‘incorporated a substantial part of the independent skill, labour etc. contributed by the original author in creating the copyright work’.

Fair Use Exceptions

There are a number of fair dealing and other exceptions under New Zealand’s Copyright Act 1994.

Every situation is unique so please discuss your situation with a professional advisor who can provide tailored solutions to you.

Kris Morrison – krismorrison@parryfield.com