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DIRECTOR DUTIES AND CRIMINAL OFFENCE: TRYING TO STRIKE THE RIGHT BALANCE

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 who:

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 sanctions if:

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.

http://www.legislation.govt.nz/bill/government/2011/0344/latest/versions.aspx

Written by Kylie van Heerden, James Moran at 09:00

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