Companies and Limited Partnerships Amendment Bill

We move to the debate on Part 1. This is clauses 3 to 43 and schedules 1 and 2.

I want to discuss with the Minister in the chair, the Minister of Commerce, the provision of clause 4 of the bill, which inserts new section 138A into the Companies Act. It is a varied form of the offences for serious breaches of directors’ duties, for which we have a Supplementary Order Paper.

Before doing so, can I explain why in my view these clauses are very important. We have limited partnerships and companies so as to limit the liability of investors essentially to the amounts that they invest. Otherwise, were it not for those limitations and we had either partnerships or other forms of joint venture, the participants in those ventures would put the whole of their legal entity’s wealth at risk in respect of what can be a relatively small investment. Accordingly, without these limited liability vehicles like companies and limited partnerships, capitalism does not work well because people are not willing to invest because they take too much risk in respect of a relatively small venture in respect of their other assets. Therefore, they do not put them at risk, money does not go round in the economy, and therefore the economy does not prosper as well. That is essentially why we have limited liability companies—that and the fact that that sort of outcome can be unfair to the people involved, in that they can suffer an unfair consequence in respect of their personal liability for an unincorporated venture.

When people give over money through a corporate venture or, as an investor, in a share or in a limited partnership, or when they lend money or provide services to one of those entities, they put their money at risk, and if the directors of the company or those who are in charge of a limited partnership act improperly, they can cause a loss to either creditors or the investors. So, again, there has to be a line drawn as to what their liability should be and when liability should arise if those directors of these entities breach their duties in a way that causes a loss to other people.

Again, these lines are quite hard to draw. If we get too tough with these lines, we actually do not get good people willing to act as directors, and that has been one of my criticisms of recent securities law. We have actually gone too far in respect of directors’ duties and in respect of prospectus risk when they raise money from the public. The effect of this has been that the best directors, who have already succeeded and whom you want to be bringing their efforts to bear for the good of the economy and to minimise risk for the people who would be investing in these new vehicles, are not willing to do it because of prospectus risk. Therefore, risk has actually increased because those good directors are not there, and that is a worse outcome than having a lower standard of care in respect of prospectus risk for better directors, because those better directors would do a better job.

My concern about this provision is that it is not in respect of civil liability; it is creating criminal liability for directors in some instances. I have some difficulty with the fact that the Commerce Committee was in the position that it actually had to report back to the House saying that it thought that these provisions went too far but did not really know what the answer was. That, presumably, was because submissions were received by the select committee that said that the line was not being drawn in the right place, but either the Government or the officials—who are, you know, one and the same—were not in a position to advise what the proper position was.

So the select committee reported back to the House saying that it thought that “some existing conduct by directors that is not currently subject to criminal sanctions is sufficiently blameworthy to warrant criminal punishment.”, but it also considered that “the new provisions in the bill would allow, in certain circumstances, certain conduct that is already subject to criminal sanctions to be prosecuted more directly. However, we are [also] aware that the bill will be perceived by directors and their advisers to criminalise legitimate business risk-taking behaviour.”—i.e., it said it was going too far. It was going to criminalise some behaviour that should not have been criminalised, and the effect of this—and the select committee said it explicitly—would be that it would have discouraged the entrepreneurial behaviour that we actually need in our country in order to prosper.

So the select committee flicked the bill back to the House and said: “Although we recommend no changes other than minor drafting provisions, we ... support further consideration of the drafting of these new offences to ensure that the provisions are expressed in a way that provides clear guidance to directors and does not have a chilling effect on legitimate business risk-taking”. So the bill gets back to this House with the problem that was at the centre of the first substantive provision of this bill actually still not having been fixed.

Then we have a Supplementary Order Paper that we are debating today that fundamentally changes the wording of the Act in a way that has not been considered at the select committee. It does this by changing the wording of one of the two arms of criminal liability and deleting the second. It completely ditches the second, which was that “Every director of a company who acts, or omits to act, in breach of the duty in section 135 (reckless trading) commits an offence if [they] know that that conduct will result in serious loss to the company’s creditors.” That has gone. That has been ditched completely and I am not sure whether that is right or not. I suspect it is right, actually, but I am surprised that if that was so obviously right, it was not ditched at the select committee and that the bill went to the select committee with it in, in the first place. I am further surprised that if it is being ditched now, the Government and the officials could not give that advice to the select committee when the bill was there recently.

In respect of the first arm of these prosecutions, the Government has changed it from “every director of the company who acts, or omits to act, in breach of section 131 (of directors to act in good faith and in best interests of the company) commits a [serious] offence if he or she knows that that conduct is seriously detrimental to the interests of the company.” It has softened that substantially, so that it now reads: “A director of the company commits an offence if the director exercises powers or performs duties as a director of the company ... in bad faith towards the company and believing that the conduct is not in the best interests of the company; and (b) knowing that the conduct will cause serious loss to the company.”

Again, I can see why the first test was too loose. I really think that was a case of how long is a piece of string. The phrase “seriously detrimental to the interests of the company” is pretty loose language. But I am questioning why it is that you have proven bad faith—they did not intend good things; they intended to act badly, believing that it was not in the best interests of the company—and it seems pretty serious there. So this is deliberately bad-faith conduct, and then it says that you still have to prove, in addition to that, that they knew that the conduct would cause serious loss to the company.

I am not convinced, having toughened up new section 138(1)(a), that you actually need new section 138(1)(b). In that situation, where someone has acted in bad faith, you have had to prove that they believed that their conduct was not in the best interests of the company, and then you have still got to prove that it is serious loss. Why should you have to prove serious loss? I would have thought in that case, if it was not serious loss, the penalty is not going to be very high. The conduct has still been highly improper if you knew that you were acting in bad faith and you did it deliberately, believing that it was not in the interests of the company. I would have thought the criminal law should have a look at that. If it was not very serious loss, no prosecution is going to be brought. We have got prosecutorial guidelines and people exercise their discretion, but if there is a prosecution, why do you have to prove serious loss?

So my question for the Minister is: do we at this stage have confidence to know that we have got it right? I have not had much confidence in this process until now, given the history, as I understand it, from the documents. I was not on the select committee and I do know a bit about this stuff, but I have not had the benefit of the submissions. I am surprised that at the Committee stage we are actually effectively fundamentally changing these clauses as they went to the select committee and as they came back from the select committee. I would ask the Minister to address why that was necessary and, secondly, to address why it is, once you have proved bad faith and knowledge that the conduct was not in the best interests of the company, that you have to prove serious loss rather than just letting that go to the criminal justice system. If it is not a serious loss, then, obviously, the penalty is not going to be very high.

💬 Dr David Clark: I am happy for the Minister to take a call first if he wishes to address those issues, but otherwise I will take a call, Mr Chairperson.

I call Dr David Clark.

I do look forward to hearing those questions answered, and the Minister of Commerce was halfway to his feet. I was quite happy for the Minister to speak first, because it would be very interesting to hear why those judgments had been made, why that serious rewrite in Supplementary Order Paper 465 has been deemed appropriate at this late stage. I too was not on the Commerce Committee so I am not completely privy to what happened there. Perhaps the select committee chair will enlighten us in due course as to the process that was followed, because it certainly is strange.

For the benefit of viewers at home who are following this debate keenly, I will hold up the original bill, which is about this thick, and the Supplementary Order Paper, which is slightly thicker. There is actually more in the changes than there is in the original bill, if you look at it in those simple terms. It is a weighty tome, and there has been a substantial rewrite of the bill at this stage. It may be that some of those points are correct. It may be that the changes introduced in Supplementary Order Paper 465 are indeed appropriate, as Mr Parker has reflected on from his own experience and in terms of the nature of limited liability companies—the desire to make sure that the risk-benefit ratio is correct. But changing those tests in such a significant fashion surely warrants an explanation from the Minister. I was pleased the Minister was halfway to his feet, so I expect we will get an explanation shortly.

The Companies and Limited Partnerships Amendment Bill as a whole addresses some important issues, and I think it is vital that we cover those off. It is a call for transparency and finding out for the Registrar of Companies who indeed is not complying with the Companies Act. It gives new powers to the registrar, and these include the power to flag companies on the register that are under investigation. This has got to be a good thing. It also lays out the consequences, and that too is a good thing. The removal of companies from the register if they provide inaccurate information or persistently fail to comply with the Act is something that should be allowed for, and it is indeed in this bill. The bill also aims, as we had it first off, to make similar changes to the Limited Partnerships Act so that those misusing New Zealand companies cannot avoid the new regime by registering as a limited partnership instead. That is something we try to do in this Parliament all the time—anticipate the unintended consequences of legal changes and to head them off at the pass.

The bill aims to better align the Companies Act with the Takeovers Code to ensure that shareholders understand the effect that changes in company control will have on the value of their shares and that this is another transparency measure. We all know that markets are about information sharing. That is the fundamental useful function of markets—they share information so that people can make investment decisions and so that capital is efficiently used. We all know that markets, if they are properly regulated, can work in the interests of people, or they can serve their own ends, often not in the interests of people, if they are improperly regulated. This provision is aimed at aligning the Companies Act with the Takeovers Code. There are also further consequences outlined in the bill, such as criminal offences for directors who commit a serious breach in their duty to act in good faith. As we have seen, the tests around those are weighed up anew.

This bill is one that Labour will support, but we are very keen to hear from the Minister as to why such dramatic changes have been made to this bill. It is some time since we last debated it. New Zealand enjoys an international reputation as a trusted place to do business. It is important that we have the legislation correct. It is important that the reputation that we have as an easy place to do business is maintained. It is important that New Zealand is not exposed to bad media about using shell companies and other vehicles for avoiding tax. Let us not forget, though, that this does not seem to have been that much of a priority for the Government, since indeed this bill has languished at the bottom of the Order Paper for some time, both at first reading and at second reading. It is only at this late stage that we are getting these changes.

The year before last, New Zealand, along with Russia, was struck off a prestigious European Union banking and corporate white list over the country’s weak ministry—

Just very briefly, Supplementary Order Paper 465 is actually a tracked version of the entire Companies and Limited Partnerships Amendment Bill and its changes. So measuring it by weight or number of pages is not all that scientific. Also, to put Mr Parker’s mind at ease, the criminalisation in respect of section 135 has been removed as a stand-alone offence and is now included as a new offence under section 380 of the Companies Act.

I am sorry to interrupt the honourable Minister. The time has come for me to report progress.

Progress to be reported presently.

House resumed.

The Chairperson reported the debate on the performance and current operations of Crown entities, public organisations and State enterprises; the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill with amendment; the Vulnerable Children Bill with amendment and that the Committee had divided it into three bills; and progress on the Companies and Limited Partnerships Amendment Bill.

Report adopted.

The House adjourned at 9.57 p.m.