New Zealand: Recognising Corporate Failure is a Fact of Life

Last Updated: 3 June 2003
Article by Cathy Quinn

This article was originally written in 2002

A big year for corporate woe

In recent years we have heard many sad tales from the collapse of Enron to the current leaky building crisis in New Zealand, where investors have lost considerable money. Usually these have involved poor company strategy, poor disclosure and misrepresentation about business prospects. Understandably, there have been increased calls for greater protection for investors. Others have focused on accidents in the workplace and making directors of the company involved more responsible, and in some cases criminally prosecuting them under what would be known as "corporate manslaughter". We should not be surprised at the passion that has surrounded some of these issues. However, we should also be careful about how we respond, particularly in regards to suggestions that the notion of limited liability companies should be changed.

Worries over limited liability

The Minister of Commerce, Lianne Dalziel, has talked this year of lifting the "corporate veil", understandably frustrated as she is by the situation where investors and creditors are left high and dry by corporate insolvencies. Her major concern is with those companies that knowingly use multiple corporate entities to prevent the recovery of funds. Some have seen her words as preparing the way for an assault on the concept of limited liability companies. While she has stressed she has no intention of doing away with limited liability companies, there will understandably be some nervousness until she makes clear her intentions.

Standing the test of time

It’s important to guard against simplistic arguments in such a complex area. We must also guard against the ideal of limited liability being compromised as part of any debate. There are very good reasons why the limited liability company has been the foundation of corporate law for more than 100 years. Such a structure is absolutely crucial to maintaining an environment that is conducive to business. It is also vital to encouraging entrepreneurial activity in New Zealand, something we increasingly need to encourage despite the bad press engendered by the activities of certain failed entrepreneurs in the past.

Failure is a fact of life

There will always be corporate failures, there will always be bad directors and bad building work. It’s a fact of life. There might well be scope for further protecting innocent home buyers from unscrupulous property developers who set up a company for a particular property development, build poor quality homes and walk away from the obligations of that company to those innocent buyers. Further protection in respect of this sort of scheme might involve requiring performance bonds or other forms of security. However, as a general rule under our corporate and others laws there is already considerable scope to punish the actions of unscrupulous individuals who are directors of companies. One has only to look at the existing liabilities faced by company directors, plus the bureaucracy involved in running companies, looking after a workforce and dealing with such matters as the Resource Management Act, to see the onerous requirements any business already faces.

Careful what signals are sent

The Government has made it clear that it wishes to encourage economic and business growth in New Zealand. While creating the right economic environment is part of its contribution, setting in place the right legislative environment is equally important. Attempts to protect creditors and investors further should not done by adding to the bureaucratic burden that businesses still face in this country. We still need to encourage entrepreneurs - whether they succeed or whether they fail. The Government needs to appreciate that limited liability for business is a fundamental to encouraging business people to take risk. It should not go anywhere near tampering with that business fundamental accepted as sound corporate law for hundreds of years and seen as appropriate in virtually every jurisdiction around the world. Moving to lift the "corporate veil" would be a negative signal to those considering investment in this country.

Cathy Quinn is the Head of the Minter Ellison Rudd Watts National Corporate Group and knows a great deal about corporate and commercial law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

 

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