Vol 9 (2012) - Issue 6

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New Zealand: Criminalisation of Directors’ Duties and Reforms to Schemes of Arrangement

New Zealand, like many OECD countries, is in the midst of financial and corporate law reforms in the wake of the global financial crisis. Notable changes have included the creation of a new Financial Markets Authority and the pending reform of securities laws by the Financial Markets Conduct Bill. The Companies and Limited Partnerships Amendment Bill is among the most recent step in this series of reforms. This Bill, introduced to Parliament in July 2012, includes proposals to criminalise certain director's duties and introduce a newly prescriptive regime for many schemes of arrangement. These proposals have the potential to impact significantly restructuring in New Zealand.

Criminalisation of directors' duties
The Companies and Limited Partnerships Amendment Bill proposes to introduce a new s 138A to the Companies Act 1993 to provide for offences in relation to serious breaches of the duty of directors:
(a) to act in good faith and in the best interests of the company; and
(b) not to engage in reckless trading.

The proposed penalty for both offences is imprisonment for a term not exceeding five years or a fine not exceeding $200,000.
These reforms are a reaction, in particular, to the collapses of a number of finance companies in New Zealand as a result of which a number of private investors lost much of their personal savings.1 These collapses were arguably the most visible feature of the global financial crisis in New Zealand, and have resulted in a number of directors being successfully prosecuted under existing securities and general criminal laws (and in some cases, sentenced to prison for a number of years).
The New Zealand director's duty to act in good faith and in the best interests of the company is contained in section 131 of the Companies Act. The proposed s 138A(1) will provide that every director who breaches that duty commits an offence if he or she knows that the relevant act or omission is 'seriously detrimental' to the interests of the company.
Section 135 of the Act provides that a director must not agree to the business of the company being carried on in a manner likely to create a 'substantial risk of serious loss' to the company's creditors; or cause or allow the business of the company to be carried on in a manner likely to create a 'substantial risk of serious loss' to the company's creditors. The proposed s 138A(2) will provide that every director who breaches the duty in s 135 commits an offence if he or she knows that the relevant act or omission will result in 'serious loss' to the company's creditors. It is notable that neither of the proposed offences, as currently drafted, require any element of dishonesty.
There has been concern within the legal profession that the reforms will have a chilling effect on solvent reconstructions and workouts. A particular concern is that it may be very difficult to convince directors to continue in their roles and undertake such transactions if there is a potential risk of criminal sanction.