Commerce Minister Craig Foss has tabled a Supplementary Order Paper in Parliament amending the Companies and Limited Partnerships Amendment Bill (Bill).
Our FYI released in December last year outlined the key amendments made by the Bill to the Companies Act 1993 (Companies Act) and the Limited Partnerships Act 2008 (Limited Partnerships Act).
The Bill is now very likely to be amended following the recent tabling of a Supplementary Order Paper (SOP) in Parliament by Commerce Minister Craig Foss.In this FYI we summarise the key amendments to the Bill proposed in the SOP.
Criminalisation of directors' duties
The Bill initially proposed a new Companies Act offence of knowingly breaching directors' duties to act in good faith (section 131 Companies Act) and not to cause a substantial risk of serious loss to the company's creditors (section 135 Companies Act).
The SOP completely recasts the offence relating to the Companies Act duty to act in good faith. It removes the direct link to section 131 and, instead, introduces a new offence of exercising powers or performing duties as a director (or failing to do so) in bad faith towards the company, where the director believes the conduct is not in the best interests of the company. For an offence to occur there must also be knowledge or recklessness as to whether the conduct will cause serious loss to the company, or benefit a person other than the company. This represents a much higher threshold of criminality than the previous drafting, in particular as regards mental elements.
Directors accused of the new offence will be entitled to a defence if the company is a subsidiary and the director believes they are acting in the best interests of a holding company. To make out the defence a director must also prove they had prior agreement to the relevant conduct by the company's shareholders and an express provision in the company's constitution permitting directors to act in the best interest of the holding company. This defence is based on the existing "subsidiary acting in best interests of holding company" exception to the "best interests" duty under section 131, but introduces an additional requirement - ie prior shareholder agreement to the conduct will be required for all subsidiaries, even if they are wholly owned.
A similar defence is also available in the context of joint venture companies.
The SOP also proposes changes to the offence relating to the section 135 duty in the Companies Act. The new offence is still based on the section 135 duty not to cause or allow the business of a company to be carried on in a manner which will cause a substantial risk of serious loss to the company's creditors. An offence will occur if the director breaches that duty, knowing that serious loss will be suffered if the business is so carried on, and the relevant creditors do not consent to the business being so carried on. Again, the mental elements of the offence create a higher threshold of criminality than the previous drafting.
Registrar's powers to identify controllers of companies and limited partnerships
The SOP proposes amendments to the Companies Act and Limited Partnerships Act by providing the Registrar with new powers to identify the controllers of companies and limited partnerships for law enforcement purposes. The powers provided to the Registrar include the ability to ascertain:
- who has a control interest in the relevant entity and the full details of that interest; and
- control information relating to the relevant entity.
Amalgamations and arrangements affecting Code companies
The SOP provides for a transitional arrangement for a Code company that has already begun the amalgamation process under Part 13 of the Companies Act before the Bill comes into force.
If the Boards of the amalgamating companies have agreed to an amalgamation prior to the Bill coming into force, the law at the time of the Board's decision will apply to the amalgamation (as long as the amalgamation takes effect within six months).
Other legislative amendments
The SOP also clarifies the requirement in the Bill for limited partnerships to have at least one general partner with a substantive connection to New Zealand. The qualification requirements for general partners do not prevent overseas companies from being general partners.
If you are concerned about the impact of the changes to the Bill as a result of the SOP or would like to discuss any aspect of the new legislation, please contact us.