As a result of a number of submissions on the Companies and
Limited Partnerships Amendment Bill ("the Bill"), Commerce Minister
Craig Foss has released a Supplementary Order Paper ("the SOP").
Previously, the Bill introduced a criminal offence for directors
a. Were found in breach of the duty to act in the
best interests of the company while knowing that conduct would be
seriously detrimental to the company; or
b. Allowed the company's business to be carried
on in a manner likely to create a substantial risk of serious loss
to the company while knowing that conduct would result in serious
loss to the company's creditors.
There was concern that the Bill would have "a chilling effect on
legitimate business risk-taking". It is for this reason the SOP has
softened the offending provisions of the Bill and raised the
threshold for liability, in which directors will only face criminal
A director exercises powers or performs duties as a director of
the company, or omits to exercise powers or perform duties as a
director of the company:
a. In bad faith towards the company; and
b. Believing the conduct is not in the best
interests of the company; and
c. Knowing, or being reckless as to whether, the
conduct will cause-
i. Serious loss to the company; or
ii. Benefit or advantage to a person who is not
the company (including, for example, to the director).
The SOP also introduces a defence to the criminal offence. It is a
defence if the director proves, in relation to the company
concerned, that he or she had prior shareholder approval for the
relevant conduct, along with the belief that the conduct was in the
best interests of the company's holding company or a joint venture
between its shareholders, provided that the company's constitution
contains express permission for directors to act in the best
interests of the holding company or shareholders.
Further, the SOP removes the reckless trading offence and replaces
it with a new offence under the current carrying on business
fraudulently section of the Companies Act 1993 (section 380). The
proposed offence will apply where a director agrees to, or causes
or allows, the business of the company to be carried on in a manner
that causes serious loss to 1 or more of the company's creditors
and knows that serious loss will be suffered. However, the offence
is not committed if the creditors concerned gave their prior
consent to the business being carried on in that manner.
In a statement Mr Foss said, "The changes in relation to
directors' duties follow substantial consultation with key
stakeholders. They strike the right balance between holding to
account directors who irresponsibly breach their duties and cause
serious loss while still allowing legitimate risk-taking." It
is important that the law strikes a balance between imposing
sanctions on directors for dishonest conduct or intentional
breaches of the law and not discouraging capable prudent people
from becoming directors.
The Bill is yet to come up for its second reading in Parliament,
but we will be following developments and will keep you informed as
to the Bill's progress.
To check out the full SOP and Bill, click here.