Most Read Contributor in New Zealand, September 2016
It took several iterations and three Supplementary Order
Papers, but the result justifies the effort – we now have a
workable solution to the vexed directors' crimes provisions in
the recently passed Companies Amendment Act.
Clause by clause analysis
Amendment Act, which was broken out from the Companies and
Limited Partnerships Amendment Bill following a final
SOP, criminalises misconduct relating to the existing good
faith and reckless trading duties in the Companies Act (contained
within sections 131 and 135 respectively).
We summarise below the new offences in the final Amendment Act,
which reflects extensive engagement with governance experts,
including Chapman Tripp.
Good faith and best interests
(new section 138A Companies Act)
A director of a company commits an offence if the director
exercises powers or performs duties as a director of the
in bad faith towards the company and believing that the conduct
is not in the best interests of the company, and
knowing that the conduct will cause serious loss to the
(amendment to section 378(a) Companies
Every director, employee, or shareholder commits an offence who
fraudulently takes or applies property of the company for his or
her own benefit or for a use or benefit of a person other than
Dishonestly incurring a debt
(amendment to section 380 Companies
A director commits an offence if:
the company incurs a debt when insolvent or that, on its own or
taken with other debts, has the effect of tipping the
company into insolvency, and
he or she knew of the existing insolvency or knew that the
company would become insolvent, and
the director's failure to prevent the company incurring the
debt was dishonest.
Directors convicted of these offences are liable to a term of
imprisonment not exceeding five years or to a fine not exceeding
A long trip but the destination is worth the journey
It has been a long road to this destination – three SOPs,
exhaustive consultations and countless hours of officials' time
– and we still consider that sufficient redress was already
available through the Crimes Act and the Companies Act.
But the fact that each of these new offences now requires an
element of both knowledge and dishonesty does deal with our most
The Bill as first drafted provoked unease in boardrooms around
the country and even invited criticism from international
commentators because it extended criminal sanctions into what is
effectively normal commercial risk-taking and undermined the stated
purpose of the Companies Act – this being to "affirm the
value of the company as a means of achieving economic and social
benefits through...the taking of business risks".
The benchmark for assessing how these offences will impact on
business decision-making is how the law would lead a responsible
legal adviser to advise a director client in a typical work-out
scenario. The effect of earlier versions of the reckless trading
provisions in particular would have created an argument for
directors to put up the shutters even if there was a reasonable
prospect of the company trading through.
This could result in diminished returns to the creditors, whose
interests the legislation seeks to protect in these circumstances.
It also contradicts the directors' own fiduciary duties which,
in situations of compromised solvency, effectively switch from the
shareholders to the creditors.
The law as it has finally emerged has moved away from some
earlier attempts to resolve this through specific prescriptions and
safe harbours, to an approach which focuses on whether the
directors' actions in the circumstances amount to dishonesty.
We prefer this approach because it is more flexible, is easily
understood and is consistent with the basis on which workouts are
undertaken against the backdrop of existing section 135 duties.1 As
a result, we consider this law should not create a substantial
additional barrier to properly conducted work-outs.
Chapman Tripp has commented extensively on this aspect of the
Bill and on the search for a solution:
The Hon'ble High Court of Bombay has held that where a Scheme of Amalgamation is executed between two companies registered in two different states [...], then the said two orders are two independent instruments.
Lawyers are pretty good at figuring it out quietly and amicably among themselves, without recourse to a public courtroom.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).