A Welcome Reform: Modernising the Companies Act

19 Sep 2024

A Welcome Reform: Modernising the Companies Act

On 5 August 2024, the Government announced a two-phase process to update the Companies Act 1993 (the Act) and related corporate governance legislation. Considering the Act was first introduced over three decades ago and has only had limited reviews and amendments, many of its provisions have become outdated, no longer adequately addressing the demands of modern business practices or technological advancements.

Recent decisions from the Supreme Court such as Debut Homes and Mainzeal have highlighted the complexities and ambiguities within the current framework governing directors’ duties and liabilities. Directors also face potential liability under various other statutes, further increasing their burden and potentially deterring them from pursuing innovative or growth-oriented ventures. The Government’s announcement is, therefore, a welcome reform by both current and prospective directors.

The two-phase process

The first phase of the reform aims to modernise New Zealand’s company law by ensuring that the rules governing companies are clear, practical, and aligned with contemporary business practices. This phase will focus primarily on targeted improvements to the Companies Act 1993, with additional amendments to the Insolvency Act 2006 and the Limited Partnerships Act 2008. The Government anticipates introducing a bill for these reforms in early 2025.

The second phase will involve a comprehensive review by the Law Commission, with a particular focus on directors’ duties, liabilities, penalties, and enforcement mechanisms. This review will address concerns highlighted by the recent Supreme Court decision in Mainzeal and other related issues, providing clarity and potentially reducing the risks faced by directors.

Key reforms

The proposed reforms cover a range of significant areas, including:

• Changes to the definition of a ‘major transactions’: Clarifying that capital structure-related transactions, such as share issuances, dividends, and buy-backs are not ‘major transactions’. Additionally, the reforms ensure that companies cannot circumvent the major transactions regime by splitting major transactions into a series of smaller, related deals or by executing the transaction through a subsidiary.
• Expansion of the use of the NZBN: Streamlining processes by expanding the use of the New Zealand Business Number (NZBN) to connect and transact with each other and the Government.
• Director privacy protections: Allowing directors to remove their home addresses from the Companies Register and replace them with a service address.
• Unique identifiers for directors and general partners: Introducing unique identifiers for better tracking and accountability.
• Mandatory director email addresses: Requiring directors to provide email addresses for improved communication and transparency.
• Reduction in share capital: Proposing a new method for companies to reduce share capital, subject to board and shareholder approvals and a director solvency certificate.
• Unclaimed dividends: In situations where a shareholder has not claimed a dividend after a two-year period, a company can mingle unclaimed dividends with its own money. The shareholder would retain their right to the dividend as a contingent liability, instead of a permanent liability under the current legislation.
• Insolvency law improvements: Following recommendations from the Insolvency Working Group, seeking to enhance outcomes for creditors and addressing issues such as voidable transactions and phoenix companies.
• Extended employee payment preferences: Expanding existing employee payment preferences to include long service leave and payments in lieu of notice.
• Gift card and voucher protections: Requiring companies in liquidation or receivership must honour at least 50% of the value of issued gift cards or vouchers if they continue to trade.

Other technical modernisations include:

• Remote attendance and electronic voting: Updating meeting procedures to allow for remote attendance and electronic voting, reflecting modern business practices.
• Streamlined document submission: Enabling documents to be uploaded to the Companies Register without requiring a signature, reducing administrative burdens.
• Simplified deed execution: Providing more flexibility in who can execute deeds on behalf of a company.
• Reduction of paper-based requirements: Removing the necessity for certain types of information to be provided in hard copy or advertised in newspapers.

Balancing accountability and innovation

New Zealand is home to over 700,000 companies of varying sizes although mostly small and medium sized entities, and these reforms seek to strike a delicate balance between holding directors accountable and encouraging them to take legitimate business risks by innovating. The goal is to create a legal framework that fosters innovation and commerciality while ensuring robust governance standards.

We will continue to monitor developments in this area and provide updates as more information becomes available. If you require advice on your responsibilities as a director or any of the matters discussed above, please do not hesitate to get in touch with our experienced team.