The Government has tabled a further Supplementary Order Paper (SOP 403) to the Companies and Limited Partnerships Amendment Bill. This SOP supersedes and incorporates, with modifications, the previous SOP 249 (see details on that SOP in our earlier update here) and is expected to be the last of the substantial amendments to the Bill, paving the way for the Bill's enactment early in 2014.

Additional qualifications to the new directors' "reckless trading" offence

The main focus of the latest SOP relates to the proposed amendments to the Companies Act 1993 regarding the criminalisation of certain directors' duties, which were introduced as part of a package of reforms made in response to the Government's 2010 securities law review.

In its current form, the Bill inserts a new section in the Act providing for offences in relation to serious breaches of:

  • the duty provided for in section 131 of the Companies Act (the duty of directors to act in good faith and in the best interests of the company); and
  • the duty provided for in section 135 of the Companies Act (the duty of directors not to agree to, or cause or allow, company business to be carried on in a manner likely to create a substantial risk of serious loss to the company's creditors).

The Government is of the view that the offences are necessary to fill gaps in the criminal law's coverage of dishonest misconduct by company directors and to complement other recent reforms such as the offences provided in the Financial Markets Conduct Act 2013. Bell Gully and a number of other law firms, professional bodies and academics have opposed the introduction of these offences as being flawed and unnecessary (see details of those submissions here). The Government has maintained its original policy position on these offences, however, it has responded to concerns raised by us and others by narrowing the scope of the offences and by introducing defences designed to safeguard honest directors and minimise the effect that the offences may have on legitimate risk-taking by directors.

The first SOP to the Bill made some changes to the offence relating to the section 131 duty (see our earlier update on these changes here) and removed the second offence relating to the "reckless trading" duty in section 135. In its place a new offence was created as part of the section in the Companies Act which provides for offences where persons set out to deliberately and knowingly defraud creditors (section 380).

The new section 380 offence (which is based on the section 135 duty) arises where a director agrees to, or causes or allows, the business of the company to be carried on in a manner that causes serious loss to one or more of the company's creditors and knows that serious loss will be suffered. A director is not liable under this offence if the creditors concerned consented to the business being carried on in that manner.

Under the latest SOP, the Government is now also proposing that a director charged under the new section 380 offence would not be found liable if the director could show (on the basis of an evidentiary foundation) that he or she:

  • believed on reasonable grounds that the creditor or creditors who would suffer the serious loss had been identified; and
  • believed that those creditors consented to the business being carried on in the relevant manner.

The amendments proposed by the SOP also confirm that the new offence will not be triggered where a company is carrying on business in accordance with any of the Companies Act's corporate restructuring provisions (that is, with a compromise under Part 14, a court-ordered arrangement, amalgamation, or compromise under Part 15, an administration under Part 15A, or a deed of company arrangement made under Part 15A).

Other amendments

SOP 403 also makes a number of updates resulting from the recent enactment of the Financial Markets (Repeals and Amendments) Act 2013 to both the Companies Act and the Limited Partnerships Act.

Next steps

The Bill is currently at the Committee of the whole House stage of the Parliamentary process – one step away from the third and final reading of the Bill. It has now been making its way through the Parliamentary process for nearly three years and contains a number of reforms that have been on the political agenda for a lot longer than that, including provisions to tighten New Zealand's company and limited partnership registration regimes to guard against New Zealand entities being targeted by overseas parties for illegitimate business activities.

We expect to see the Bill near the top of the Government's Order Paper when Parliament resumes sitting at the end of January 2014.