New company law mooted

Press, 2 June 1989, Page 14

New company law mooted

By

PATTRICK SMELLIE

in Wellington

The most comprehensive update of New Zealand's Companies Act was tabled in Parliament yesterday by the Minister of Justice, Mr Palmer.

A rewritten draft act is contained in the Law Commission report, and is the result of several years work. The Government has yet to decide whether to accept its recommendations.

The proposed new act seeks to strengthen shareholders’ and directors’ rights and responsibilities, along with streamlined procedures for the creation, running, and dissolution of companies. It is drafted in plain English, and is designed to be used as a first recourse by shareholders and company officers alike, as well as lawyers.

It attempts to draw together in an “accessible and intelligible” form the disparate case law which now determines interpretation of the Companies Act 1955.

It is aimed more at the about 160,000 private and public unlisted companies registered in New Zealand, leaving protection for investors in public-listed companies to securities law reform.

Concepts of par and nominal capital value are abandoned in the proposed regime, with the commission arguing that these have been

illusory protections for shareholders and creditors.

A tough, new solvency test is suggested as the principal test of a company’s health. “The solvency test is one of the pivotal provisions in the act,” the report said. Directors would be personally liable if they were found to have taken an “unreasonable risk” with the solvency of the company. But the proposals are less prohibitive than the existing Companies Act, which was felt too restrictive of the legitimate need for businesses to take risks.

Under the new act, companies would also be allowed to buy their own shares, bringing our law into line with standard international practice and eliminating the circumvention of the existing law which commonly occurred now, a commission member, Ms Sian Elias, said. But directors would be obliged to certificate their reasons for such action being in the best interests of the company.

This and other instances of obligatory certification by directors would improve information availability and help reduce litigation costs.

While information to be disclosed to the Registrar of Companies would be reduced under the new regime, there would be greater shareholder rights to obtain information.

Shareholders had their rights also strengthened by

improved standing to enforce obligations owed to the company and directly to shareholders through the courts. In addition, a special new protection for minority shareholders is suggested. In the event of the company taking actions which were against the interests of a minority, they would have the right to be bought out by the company.

“The buy-out remedy is especially important in the case for companies where there is no ready market for the shares,” the report said.

This was in line with international trends, although the New Zealand draft included some new protections for companies in the buy-out arrangements, said Ms Elias. Directors’ powers and duties are restated in the new act, with emphasis on positive statement of their role, rather than the negative framing of the 1955 act.

In addition, many of the obligations of directors were not to be found in the act, but in subsequent case law.

Reform in this area was “a matter of urgency.” Distribution of power within a company would be redefined by the direct operation of a statute rather than a deemed contract.

A new standard form of company constitution based on Table A of the existing act would be introduced, with the flexibility for companies to vary their constitutions as

required. Liquidation rules are also greatly simplified, and new requirements for the experience and■ independence of receivers and liquidators are suggested.

The position of Registrar of Companies would be reduced to an administrative one, with the commission suggesting investigative powers should be vested elsewhere and co-ordi-nated with other securities law reform.

If adopted, the commission suggests all companies should be required to re-register within three years of enactment.

This would assist in purging the registrar, and help in the process of computerising Companies Office records.

Mr Palmer welcomed the report, saying it would be carefully considered, but stopped short of saying the draft act would be accepted.

He pinpointed changes to the role of the Registrar of Companies, the balance between encouraging enterprise and stemming abuse, and the need for harmonisation with Australian law as the main areas of debate.

An Opposition spokesman, Mr Doug Graham, said the report was soundly based, but expressed reservations about a lack of co-ordination in the huge amount of corporate law reform now under way.

“I hope someone’s going to be able to pull all the strands together,” he said.