Edmonds Judd

Companies Act 1993

Modernising the Companies Act

Commercial, News
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In August 2024, the government announced that it would progress a package of reforms to the Companies Act 1993 and related legislation.

 

The reforms are designed to address several issues that are regularly encountered in practice, to make New Zealand an easier and safer place to do business and to increase uptake of the New Zealand Business Number (NZBN).

 

The reforms will be carried out in two phases:

  • Phase 1 will focus on modernising the Act, simplifying compliance, deterring poor and illegal business practices and making improvements to insolvency law to make outcomes fairer for creditors. The bill introducing these reforms is expected in early 2025, and
  • Phase 2 will take place after a Law Commission review of directors’ duties and liability issues, which is also due to begin in early 2025.

 

Phase 1

The first phase includes reforms that will address several practical issues. The key changes that have been suggested for Phase 1 include:

  • Introducing a simpler process for a company to reduce its share capital, modelled on Australian legislation
  • Amending the definition of ‘major transaction’ by excluding transactions relating solely to the capital structure of a company (for example: issuing shares, share buy-backs, dividends and redemptions) and by clarifying that a series of related transactions does constitute one ‘major transaction’
  • Extending the shareholder unanimous consent process in section 107 of the Act to cover issuing options or convertible securities, crediting unpaid share capital and acquiring shares to be held as treasury stock
  • Providing a process for dealing with unclaimed dividends
  • Providing for certain actions such as share buybacks and a company holding its own shares to be available by default (currently these actions are only allowed if expressly permitted by the company’s constitution)
  • Simplifying processes to reserve company names, restore companies to the register and correct mistakes on the register
  • Allowing companies to put certain shareholder and creditor information on a webpage rather than having to physically send out copies to each person
  • Introducing unique identifier numbers for directors and changing address requirements so directors’ residential addresses don’t have to be disclosed on the public register
  • Improving insolvency laws by extending the claw back period for related party transactions, and
  • Introducing various measures to improve the uptake of the NZBN.

 

The bill containing the reforms will be introduced in early 2025, and the public will be able to make submissions on the legislation as it progresses through the select committee stage.

 

Phase 2

The second phase is expected to begin in parallel with Phase 1, starting with a Law Commission review of directors’ duties and liabilities. This is expected to address several concerns, including that the law related to reckless trading and incurring obligations is unclear and difficult to apply.

 

 

 

DISCLAIMER: All the information published in Fineprint is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Fineprint may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650

Business briefs

Commercial, Employment, News, Your Own Business
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Companies Act reforms announced

The government has announced a suite of changes to the Companies Act 1993 aiming to improve fairness and the ease of doing business in New Zealand. The reform is expected to take place in two phases.

 

Phase One: The first phase focuses on the modernisation and simplification of the Act to better reflect a more evolved business and technological landscape.

 

Specific proposed changes include:

  • Providing a process for reducing the share capital of a company that does not require court approval
  • Amending the definition of ‘major transaction’ to exclude transactions relating to the capital structure of a company and clarify that a series of related transactions are captured by the definition
  • Adding additional types of transactions that can be approved by unanimous shareholder consent
  • Allowing companies to mingle unclaimed dividends with other funds after two years
  • Assigning unique identifiers to directors to prevent ‘phoenixing’ (where a new company is registered to take over an insolvent or unsuccessful one), and
  • Allowing directors and shareholders to have their residential addresses removed from the Companies Register, resolving safety and privacy concerns.

 

Further insolvency law amendments are also being proposed, including extended claw back periods, preference for long service leave and greater honouring of gift cards.

 

Phase Two: The second phase will involve a Law Commission review of directors’ duties and related issues such as director liability, sanctions and enforcement.

 

The bill introducing Phase One is expected to be introduced in early 2025 and Phase Two will closely follow.

 

 

Siouxsie Wiles employment decision

In July, the Employment Court ruled that the University of Auckland had breached its health and safety, and good faith obligations to Associate Professor Siouxsie Wiles.[1]

 

Dr Wiles was prominent in the media during the Covid pandemic, communicating complex Covid information in an understandable way to the public. Dr Wiles received harassment and abuse, both online and offline, from those who disagreed with her. She sought help from the university, but was told that it was not part of her academic duties and that she should minimise further public statements until a security audit had been completed.

 

Although the university was commended for the actions it did take, ultimately, those actions were insufficient. The Employment Court was critical of the university’s delay in responding to safety concerns and the university’s misplaced focus on Dr Wiles’ outside activities. The court found that the onus was on the university to obtain the right health and safety advice, and proactively put a plan in place. By failing to do so, the university was not acting in good faith and was breaching its contractual obligations to be a good employer.

 

This ruling serves as a good reminder that employers, especially those in the public sector or that engage with the public, should consider health and safety risks in relation to employees’ work-related activities, including where those activities pose a risk of harassment. Employers may also be responsible for work related activities occurring outside of an employee’s work premises and normal working hours.

 

 

New bill to improve consumer data rights

Parliament is currently considering the Customer and Product Data Bill – a bill designed to increase consumer control over their data. It is currently with the select committee. If passed, the legislation will create an obligation for businesses that possess customer data to provide, on request, that data to those customers and certain third parties.

 

The bill will help consumers access their data to compare services and change providers, making it easier for new or smaller businesses in an industry to compete with the ‘big players.’ The bill introduces hefty fines for non-compliance, including a fine of up to $50,000 for failing to respond to a data request and a fine of up to $5 million for making an unauthorised data request. Initially, the bill will only apply to the banking, electricity, and telecommunications sectors.

 

 

Changes to insurance industry coming

The Contracts of Insurance Bill, that awaits its second reading, will make significant changes to the rights of policyholders and insurers to promote confidence in the insurance market and ensure that insurers operate fairly. The bill proposes several changes to insurance contracts legislation, including:

 

  • Disclosure duties: The bill draws a distinction between consumer policyholders (where the insurance contract is for personal, domestic or household purposes) and non-consumer policyholders. Consumer policyholders will have a duty to take reasonable care not to make a misrepresentation to the insurer.
    Non-consumer policyholders will have a duty to make a fair representation of the risk. This shifts the burden on insurers to ask the right questions to reveal all the information they need
  • Unfair contract terms: The bill removes the existing exception for standard form insurance contracts from the unfair contract term provisions in the Fair Trading Act 1986. In other words, the unfair contract terms regime will apply more widely to insurance contracts, meaning insurers must make sure that the provisions of their insurance contracts are fair.
    There are still some exceptions in insurance contracts that will not be subject to the unfair contract terms regime, including event, subject or risk insured, sum insured, the basis for settling claims, excess, and exclusions or limited liability in certain circumstances, and
  • Proportionate remedies: Insurers will no longer be able to avoid an insurance contract for any failure or misrepresentation of a policyholder. Instead, insurers will have proportionate remedies based on how it would have responded if it had known the relevant information, such as reducing the amount paid on a claim.

 

Uber appeal dismissed: drivers are employees

In 2022, the Employment Court made a landmark ruling against Uber when it found four Uber drivers were employees and not independent contractors.[2] Uber appealed the decision, and the Court of Appeal issued its decision in August.[3] The Court of Appeal criticised the Employment Court’s approach, stating that the first step should be to look at the parties’ agreement governing the relationship, rather than whether the individual is vulnerable or suffering from an imbalance of power. Ultimately, however, the focus should still be on the parties’ mutual rights and obligations, interpreted objectively.

 

Despite these criticisms, the Court of Appeal still dismissed the appeal affirming the finding that Uber drivers are employees. This means Uber must provide the drivers with employee benefits, including minimum wage, leave entitlements and holiday pay.

 

The decision only applies to the four Uber drivers, but it has implications for all businesses that engage contractors, particularly for those operating in the gig economy. It is a timely reminder for businesses that rely on contractor workforces to ensure their contracts accurately reflect the nature of the relationship with their workers.

 

The Workplace Relations and Safety Minister Brooke van Velden has indicated that the coalition government intends to amend the Employment Relations Act in 2025 to increase certainty and clarity for contractors and businesses regarding employment status of workers. The changes will provide a four part gateway test which, if met, would mean a worker is a contractor. More information on the government’s announcement can be found here.

 

If you would like to know more about how any of the items in Business briefs may affect you and your business, please don’t hesitate to contact us.

[1] Wiles v University of Auckland [2024] NZEmpC 123.

[2] E Tū Inc v Rasier OperaAons BV [2022] NZEmpC 192.

[3] Rasier OperaAons BV v E Tū Inc [2024] NZCA 403.

 

 

DISCLAIMER: All the information published in Commercial eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Commercial eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650

Postscript

Commercial, Property, Your Own Business
0

Mainzeal case

The implications of the Mainzeal case[1] are being felt far and wide amongst the directorship community. We summarise below the findings of the Supreme Court case.

 

In August, after the case worked its way through the High Court and Court of Appeal, the Supreme Court found that the directors should be personally liable for $39.8 million plus interest payable  at 5% pa from the date of liquidation – together more than $50 million. The chief executive of Mainzeal (who was also a director) is responsible for the full sum, and the personal liability of the three other directors was capped at $6.6 million each plus interest.

 

In 2013, Mainzeal went into receivership and liquidation. It was calculated the company owed around $110 million to unsecured creditors. The liquidators believed that the directors of the company had breached s135 (reckless trading) and s136 (trading whilst insolvent) of the Companies Act 1993 and should be held personally liable for the losses of the company’s creditors.

 

Many directors may want to take a moment to reflect on what the Supreme Court decision may mean for them now and in the future. Becoming personally liable for a company’s debts is a significant risk associated with accepting (or continuing) a director role.

 

If you are considering taking on a directorship, you should take independent legal and accounting advice to not only carefully assess whether your skills are a good match for the company and the sector in which it operates, but also to be clear on any potential personal liability.

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

 

DISCLAIMER: All the information published in Fineprint is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Fineprint may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650

Mainzeal decision

Commercial, Latest news, Property, Your Own Business
0

Major implications for company directors

Taking on the responsibility of a directorship is not a decision to be taken lightly. For New Zealand directors, the magnitude of the director role has been hammered home with the decision of the Mainzeal case from the Supreme Court in late August.[1]

This decision has sent a strong signal from the New Zealand justice system that directors can, and will be, held personally liable for financial losses experienced by creditors if the directors allow the company to trade recklessly and/or trade while insolvent.

 

About Mainzeal

Mainzeal Property and Construction Limited was one of the largest New Zealand construction companies in the years leading up to its financial collapse.  In 2013, the company went into receivership and liquidation owing unsecured creditors around $110 million. The Mainzeal liquidators believed that the directors of the company had breached s135 (reckless trading) and s136 (insolvent trading) of the Companies Act 1993 and should be held personally liable for the losses of the company’s creditors.

 

Supreme Court decision

While going into the nuances of each of the court hearings is too complex for the scope of this article (the Mainzeal case has been heard in the High Court, Court of Appeal and Supreme Court), it is noteworthy that each court accepted that the directors should be held personally liable to some extent for a breach of their director’s duties.

At the highest court in New Zealand, the Supreme Court, the judges found that the directors should be liable for $39.8 million plus interest payable at 5% pa from the date of liquidation (together more than $50 million). The chief executive of Mainzeal is responsible for the full sum, and the liability of the three other directors was capped at $6.6 million each plus interest.

 

Facts rather than intentions

Critically, personal liability falling on a director due to a breach of directors’ duties under s135 (reckless trading) and s136 (insolvent trading) is a matter of facts, not intentions.

The Mainzeal directors were not accused of any conflict of interest or lack of honesty, and were taken on their word that they acted with good intention while running the company. Regardless, it mattered that on the facts they permitted the company to trade in a way that was reckless and allowed the company to trade while it was insolvent.

 

Companies Act 1993 may need a refresh

Both the Court of Appeal and Supreme Court indicated that a review and update of the Companies Act will be helpful.

The Mainzeal case reinforces to directors the consequences of failing to avoid reckless or insolvent trading, however the current legislation does not provide additional guidance or safe harbour for directors and their decision-making. Adding new guidance for directors’ duties into the Companies Act could enable directors to more confidently navigate the complexities of commercial decision-making with a need for accountability to their creditors.

 

Personal liability

After the announcement of the Supreme Court decision, many directors may want to take a moment to step back and allow the lessons of Mainzeal to sink in. Becoming personally liable for a company’s debts is a significant risk associated with accepting (or continuing) a director role.

Every director of a company should ensure they feel adequately knowledgeable about all key aspects of their company and the sector in which it operates. Accepting a directorship role where there are gaps in skills, or knowledge of the company or sector, can lead to an increased risk that the director may unwittingly allow, or join their other directors in, a decision that permits the company to trade in a reckless or insolvent manner, opening up personal liability and prejudicing creditors.

If you are considering taking on a directorship, you should take independent legal and accounting advice to not only carefully assess whether your skills are a good match for the company and sector, but also to be clear on any potential personal liability.

If you would like some help in assessing whether a directorship is a good fit for you, please don’t hesitate to contact us for further guidance.

 

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

 

 

DISCLAIMER: All the information published in Commerical eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Commercial eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650

Business briefs

Uncategorized, Your Own Business
0

Lego wins trade mark dispute with Zuru

The recent High Court decision in Zuru v Lego[1] is a reminder to all businesses that any use of another trader’s registered trade mark carries significant legal risk. The issue arose when Zuru used the words ’Lego brick compatible’ on the packaging for its Max Build More building brick toys. Lego argued this infringed its registered trade marks.

Zuru attempted to rely on defences that it used Lego’s mark in ‘comparative advertising’ and to ‘indicate the intended purpose’ of its product. The Trade Marks Act 2002 permits the use of another trader’s registered trade mark for these purposes, provided such use is ‘in accordance with honest practices in commercial matters.’ The court rejected the ‘comparative advertising’ defence, finding the statement did not actually compare Zuru’s and Lego’s products in any way.

The court also found that Zuru’s use of ‘Lego’ did alert customers to a characteristic of Zuru’s bricks in that they were compatible with Lego’s bricks, but it was not done in accordance with honest practices. Relevant factors leading to this conclusion included:

  • Zuru intended to gain market share from Lego by selling similar products at a cheaper price
  • There were concerns that Zuru’s actions were a ploy to strengthen Zuru’s legal action against Lego in the USA, and
  • Zuru did not obtain prior consent from Lego or advise Lego of its intention to use Lego’s trade mark.

The court determined that Zuru’s use of Lego in the compatibility statement was a deliberate attempt to leverage off Lego’s established reputation and infringed Lego’s registered trade mark rights.  If you are considering using another trader’s registered trade mark for any reason, we recommend you talk with us early on. Otherwise, you could be on dangerous, and expensive, ground.

 

Start preparing for the Incorporated Societies Act 2022

At long last the Incorporated Societies Act 2022 will come into full force on Thursday, 5 October 2023, replacing its predecessor after 115 years.  Societies can re-register under the 2022 Act from this date, and must do so by 5 April 2026 or they will cease to exist.  When applying to re-register, all societies must file a new or updated constitution that complies with the new legislation.

Other key changes under the 2022 Act include:

  • All societies must have a governing body
  • Officer duties have been set out, and are comparable to, director duties under the Companies Act 1993
  • A person must give consent to become a member of a society
  • Annual general meetings must be held, and financial statements and annual returns must be filed, within six months of the society’s balance date, and
  • Every society must have a dispute resolution process set out in its constitution.

The Incorporated Societies Regulations were released this month. Every society should be drafting or reviewing its constitution in preparation for re-registration. Under s30(A) of the Charitable Trusts Act 1957, existing  trust boards incorporated under that Act, need not re-register under the 2022 Act, but can elect to do so if they wish.  If you need a hand in doing this for your society, please don’t hesitate to be in touch – we are here to help.

 

ESG and directors: The Companies (Directors’ Duties) Amendment Act 2023 becomes law

The Companies (Directors’ Duties) Amendment Act 2023 was passed on 3 August 2023 and is now in force. The legislation clarifies that company directors may consider matters other than profit maximisation when assessing what is in the best interests of the company such as, for example, environmental, social and governance matters.

 

The Act has attracted criticism from, amongst others, the Ministry of Business, Innovation and Employment; the New Zealand Law Society; and the Institute of Directors, with many arguing the new legislation will have a marginal impact, if any.  In any event, it acts as a signpost to directors clarifying that profit maximisation is not the only consideration when discharging their duties to act in the best interests of the company.

 

[1] Zuru New Zealand Ltd v Lego Juris A/S [2023] NZHC 1808.

 

 

DISCLAIMER: All the information published in Commercial eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Commercial eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650