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Are parts of the Companies Act no longer fit for purpose?

1 Apr 2022

| Author: Jenni McManus

As the controversial Mainzeal case on the scope of directors’ duties awaits a decision by the Supreme Court, officers of incorporated societies have been warned they may face a similar fate to the Mainzeal directors if the new Incorporated Societies Bill passes its third reading in its current form.

Although the language is slightly different, clauses 53 and 54 of the bill impose on officers of New Zealand’s incorporated societies similar duties to those imposed on corporate directors in
ss 135 and 136 of the Companies Act 1993 – an issue canvassed by LawNews early last year.

And, for incorporated societies that are largely not-for-profits and often staffed by volunteers, that’s a big problem, says Chapman Tripp partner Roger Wallis.

These sections of the Companies Act require directors not to trade in a manner likely to cause serious loss to creditors and not to agree to incur obligations unless they have reasonable grounds for believing these obligations can be fulfilled when required.

Wallis has written to Commerce and Consumer Affairs Minister David Clark, urging him to excise clauses 53 and 54 from the Incorporated Societies Bill before it comes before Parliament for the final time. Wallis says incorporated societies are “not overflowing with legal and commercial experts” and generally have scant resources and skills, and that it is “egregious and unreasonable” to place such onerous duties on ordinary members of the public, with “potentially ruinous consequences”.

He wants more emphasis to be placed on an incorporated society’s purpose, rather than the legislation insisting that its officers act in the best interests of the society, as the current bill requires. “That doesn’t sit very well when you’ve carefully crafted the society’s purposes, even if it’s a simple one like playing tennis,” he says. “What does it mean to cut across that and say the officers have to act in the best interests of the society as distinct from what the society has been established for?”

Incorporated societies, Wallis says, are more akin to charities than to for-profit corporate structures and placing disproportionately burdensome requirements on their officers is likely to act as a deterrent to those who might otherwise be prepared to serve.

“In our view, significant harm could be done to organisations which are already battling to cope with immense demand on limited budgets unless clauses 53 and 54 are removed.” Wallis also notes that clause 49 of the bill requires officers to act in good faith – another reason the offending clauses are not needed.

“Their officers should be governed according to the society’s constitution, which will inevitably refer to the need for officers to act in good faith in all their dealings. This position better reflects the common law.”

Clark has refused to remove the clauses, saying the government wants to wait until the Supreme Court has ruled on Mainzeal. Further, he says, the officers’ duties won’t come into effect until 18 months after the Incorporated Societies Bill is passed and there will be a further four-year transition period. So, plenty of time to fix it up.

Not good enough, Wallis says. “It seems a bit reckless to me to knowingly pass it into law, knowing it’s deficient.” Instead, he wants the clauses removed before the bill goes back to the House and for Justice Minister Kris Faafoi to ask the Law Commission to revisit the entire Companies Act which, he says, is no longer fit for purpose. In fact, Wallis says, he recalls a speech given by Justice Tompkins at Waikato University in 1994 – a year after the Companies Act came into force – saying much the same thing.

“The law is unsatisfactory [and] there is a real risk that if you were to take on a role as an elected officer [of an incorporated society], then a well-resourced creditor could sue you personally. How is that going to encourage good people to put their hands up?” Wallis says.

The main problem with ss 135 and 136 is that they are broad and difficult to interpret. Both the High Court and the Court of Appeal have struggled with Mainzeal and adding to the uncertainty is the Debut Homes case, where the Supreme Court found that directors could be held liable for all debts incurred by a company in trading after a specific date. The uncertainty here is whether Debut Homes is confined to its facts or will be interpreted more broadly.

“The Debut Homes decision is controversial as to how far it goes and [there is] the live issue in Mainzeal where two levels of the court have come up with different theories. The Supreme Court will probably come up with a different one again,” Wallis says. Pointing out that the Supreme Court hearing took five days, he says these sections are very hard to understand.

Wallis acknowledges Chapman Tripp has an interest in Mainzeal as it acts for former Prime Minister Dame Jenny Shipley – one of four former directors staring at a $38.2 million costs and compensation bill unless the Supreme Court rules in their favour.

But he points out that the Court of Appeal shared similar misgivings about ss 135 and 136, with Justice David Goddard saying, “The legislation governing insolvent trading in New Zealand is unsatisfactory in a number of respects. The Act should be reviewed to ensure that it provides a coherent and practically workable regime for the protection of creditors where directors decide to keep trading in circumstances where a company is insolvent or near-insolvent.” ■

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