The long-awaited Supplementary Order Paper to the Companies and Limited Partnerships Amendment Bill has been tabled by the Minister of Commerce, Craig Foss. This paves the way for the Bill to progress through the final stages of the House, which we expect will happen sooner rather than later given the importance the Government has placed on some of the key amendments being introduced under this Bill. The Supplementary Order Paper (SOP) is available here.

BACKGROUND TO THE SOP

The Bill, which was introduced in 2011, will:

  • tighten New Zealand's registration regimes for companies and limited partnerships;
  • align the Companies Act provisions which allow companies subject to the Takeovers Code to amalgamate or otherwise rearrange themselves more closely to the requirements of the Takeovers Code; and
  • introduce into the Companies Act new criminal offences for directors in breach of certain statutory duties.

Further details of these provisions are available in earlier editions of Corporate Reporter here and here.

The Commerce Select Committee reported back on the Bill in December 2012 with some recommended amendments, and directed that further consideration should be given to:

  • the new offences relating to breach of the directors' duties "to ensure that the provisions are expressed in a way that provides clear guidance to directors and does not have a chilling effect on legitimate business risk-taking"; and
  • introducing a power for the Registrar of Companies to acquire information about the true owners and ultimate controllers of a company or limited partnership in order to assist law enforcement agencies investigating shell company activities and assist in meeting New Zealand's obligations as a member of the international Financial Action Task Force on Money Laundering (FATF).

These matters are both addressed in the SOP, together with some additional amendments to the provisions concerning code companies and limited partnerships.

SUMMARY OF THE PROPOSED KEY CHANGES

Criminalisation of breaches of certain directors' duties

The SOP proposes a major rewrite of provisions of the Bill previously proposed in relation to the criminalisation of directors' duties offences, although the changes still reflect Cabinet's original policy decisions on the offences. The Government's view, as expressed in the press release on the SOP, is that the amended offences "strike the right balance between holding to account directors who irresponsibly breach their duties and cause serious loss while still allowing for legitimate risk-taking."

Offence for breach of duty to act in good faith and in the best interests of the company (the section 131 duties)

The offence now arises where the director exercises powers or performs duties as a director of the company, or omits to exercise powers or perform duties as a director of the company:

  • in bad faith towards the company; and
  • believing the conduct is not in the best interests of the company; and
  • knowing, or being reckless as to whether, the conduct will cause:
    • serious loss to the company; or
    • benefit or advantage to a person who is not the company (including, for example, to the director).

The concept of bad faith is used here as a synonym for the absence of good faith, the duty under section 131 being to act in good faith. The second element "believing the conduct is not in the best interests of the company" should not capture an honestly-held, but objectively wrong, belief by a director. However, based on recent case law the courts may find that there is a potential exception where the director's belief rests on a wholly inappropriate appreciation of the interests of the company.

The introduction of the alternative recklessness requirement in the third element of the offence reflects the drafting of the Financial Markets Conduct Bill, which adopts the "knowing or reckless" standard to most criminal offences in the Bill. The third element introduces the concept of "serious loss to the company" in place of a requirement that the director knew the breach of the section 131 duty would be "seriously detrimental to the interests of the company".

New defences to section 138A offence

There has also been a welcome clarification of how this offence is to work with respect to the qualifications provided in subsections 131(2) to (4) of the section 131 duty. These subsections allow the directors' duty to be modified for wholly-owned subsidiaries, subsidiaries that are not wholly-owned and joint venture companies.

A new section 138B now provides that it is a defence to a director charged under section 138A if the director proves that he or she had the requisite authority for the relevant conduct, along with the belief that the conduct was in the best interests of that company's holding company (in relation to subsidiaries) or shareholder or shareholders (in relation to joint ventures between shareholders), rather than in the best interests of the company.

Reckless trading offence – breach of the section 135 duty

The offence based on the section 135 duty (not to agree to, or cause or allow, reckless trading) has undergone substantial redrafting too. Under this provision it is an offence if:

  • the 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
  • the director knows that a serious loss will be suffered by the company's creditors as a result of the business being carried on in that manner (whether or not the director knows the full extent of the loss or the identity of the creditors concerned); and
  • the creditors that suffered the loss did not give their prior consent to carrying on the business in that manner.

The new wording of the offence differs from the section 135 duty in a number of ways. In particular, the offence requires actual serious loss to be suffered (rather than substantial risk of such a loss) and knowledge on the part of the director that such a loss will be suffered. This creates a much higher threshold for the prosecution to overcome than the previous wording of the offence. Also, the offence is not committed if the creditors concerned consented to the business being carried on in that manner. The explanatory note to the SOP notes that this is to allow companies that are close to insolvency to enter into arrangements with their creditors to save the company without the directors facing a risk of prosecution.

New powers for Registrar to identify controllers of companies and limited partnerships

The SOP introduces further amendments to the Registrar's powers under both the Companies Act and the Limited Partnerships Act to assist to identify the controllers of companies and limited partnerships.

The Registrar must have regard to the purpose of these measures when exercising its powers, which are to "ensure that the Registrar may, for law enforcement purposes, obtain adequate, accurate, and timely information on the beneficial ownership and control of" the relevant entity "in order to conform with New Zealand's obligations under the FATF Recommendations".

The combined effect of these new powers will allow the Registrar to ascertain from certain specified persons (which includes the shareholders and directors of a company and partners of a limited partnership):

  • who has (and who has the power to acquire) a "control interest" in shares of the company and in "partnership interests" of a limited partnership; and
  • "control information" relating to a company and a limited partnership.

The term "control interest" is defined in a similar way to the definition of "relevant interest" in sections 5 to 6 of the Securities Markets Act 1988. "Control information" is defined as directions or instructions relating to the management and administration of the company (or limited partnership) or delegation of powers relating to the management and administration of the company (or limited partnership).

Information ascertained under these provisions by the Registrar (or any person authorised by the Registrar) will be able to be used by various government agencies for specified law enforcement purposes. These include any offences under the Companies Act (and Limited Partnerships Act), the Anti-Money Laundering and Countering of Terrorism Act, certain Crimes Act offences, matters relating to security under the New Zealand Security Intelligence Service Act and any similar legislation of an overseas jurisdiction.

Requirements for a general partner of a limited partnership

The SOP also includes further amendments to the Limited Partnerships Act to clarify:

  • the requirement in the Bill for limited partnerships to have at least one general partner with a relevant connection to New Zealand or to an "enforcement country";
  • that the qualification requirements for general partners do not prevent overseas companies from being general partners; and
  • that all natural persons who are general partners, or who are directors, partners, or general partners of a general partner, must be qualified under new section 19A of the Limited Partnerships Act.

NEXT STEPS

The SOP will be considered, together with the Commerce Select Committee's recommendations, at the second reading of the Bill.