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University of Otago Law Theses and Dissertations |
Last Updated: 22 September 2023
Reconsidering Directors’ Reckless Trading Duty Under Section 135 of the Companies Act 1993
Bianca Hawkins
A dissertation submitted in partial fulfilment of the degree of Bachelor of Laws (Honours) at the University of Otago, Dunedin, New Zealand – Te Whare Wānanga o Ōtākou
October 2021
Acknowledgements
Thank you to my wonderful supervisor Shelley Griffiths. Your encouragement and advice over the past two years has been invaluable. Thank you for always having time during a busy year, reading my long drafts and pushing me to improve. I am forever grateful. I will miss our catch-ups!
Thank you to my second marker Barry Allan for always having your door open for a chat and advice.
Thank you to my family for your support. I appreciate everything you all do for me. I wouldn’t be where I am today without you all!
Thank you to Michael Harper for your invaluable guidance and insights.
Lastly, thank you to all the friends and lecturers who have helped me through university.
Table of Contents
Companies Act 1993 - CA Shareholder primacy - SP Entity theory - ET Stakeholder theory - STSmall and medium enterprise - SME Inland Revenue - IR
Directors’ and officers’ insurance - D&O insurance
Introduction
Directors’ duties have always been a hotly debated topic, none more so than insolvent trading duties. New Zealand’s Companies Act 1993 (CA) contains two of these duties, ss 136 (duty not to incur obligations) and 135 (duty not to trade recklessly). The focus of this dissertation is s 135. Section 135 is the more problematic provision, it has been extensively criticised and is New Zealand’s most litigated directors’ duty.1 Debate surrounding the provision came to a head with two major recent cases, Debut Homes v Cooper (Debut) and Yan v Mainzeal (Mainzeal).2 Both cases have made their way to the Supreme Court. Despite the plentiful litigation, s 135 remains as fraught with issues as when it was introduced. The judgments show a divided judiciary, some straying into concerningly draconian territory. The extensive litigation and academic discourse indicate s 135 is deficient and needs reconsideration.
Chapter one discusses company law principles and theory which shape directors’ duties. Theory and principle underpin the law, meaning they are relevant for considering what is currently wrong with s 135 and guiding how it could be improved. It is difficult to balance principles and the tension is evident in s 135 decisions, as is the court’s straying from an entity focus.
Chapter two considers the purpose of these duties to prevent directors destroying value in companies through improper conduct and providing protection/redress to creditors and the company. Whilst there are valid reasons for reckless trading duties, they are generally inefficient and uncertain.
Chapter three outlines the development of New Zealand’s reckless trading duty and issues with the statutory provision. The courts have been left the burden of ‘fixing’ s 135.
1 Lynne Taylor “Directors’ Duties on Insolvency in New Zealand: an Empirical Study” (2019) 28 NZULR 171 at 185-186.
2 Debut Homes Limited (in liquidation) v Cooper [2020] NZSC 100; and Yan v Mainzeal Property and Construction Limited (in liquidation) [2021] NZCA 99.
Three main solutions are canvassed – amending/rewriting the provision, removing the provision and/or adding a safe harbour.3
Chapter four outlines the early case law which became defined by the Mason v Lewis (Mason) pragmatic approach.4 It struck an appropriate balance between efficiency and protecting stakeholders by interpreting s 135 with reference to the CA’s purpose. This kept commentators concerns at bay. However, there was still uncertainty in this approach and the inherent broad nature of s 135. This left room to stray from pragmatism. The issues with Debut, Mainzeal and the modern judiciaries approach generally are discussed.
Chapters three and four show the major issues with s 135 are the lack of entity focus and failure to balance the CA’s dual-purpose of protection and efficiency. The analysis in these chapters leads to the conclusion s 135 requires amendment.
Chapter five considers if s 135 is needed to address directors destroying value during finical difficulty. Reference to Delaware’s and Canada’s lack of insolvent trading duty assists this analysis. Section 135’s significant overlap with ss 131, 136 and 137 shows the duty may be an unnecessary duplication.
Chapter six discusses whether a safe harbour could help address s 135’s issues. COVID-19 saw safe harbours implemented globally, including for ss 135 and 136.5 This showed they can be useful. Australia’s permanent safe harbour for its wrongful trading duty provides helpful lessons for New Zealand.
This dissertation focuses on the company and largely stays within the bounds of company law, particularly directors’ duties. However, it is important to note s 135 spans other areas of law that must be considered when amending the provision. This dissertation will also not consider if s 135 actually modifies director conduct.
3 There are other options like compulsory D&O insurance, for more discussion see Helen Anderson Corporate Directors’ Liability to Creditors (Lawbook Co, Pyrmont, 2006); and Taylor, above n 1.
4 Mason v Lewis [2006] NZCA 55; [2006] 3 NZLR 225.
5 Companies Act 1993, s 138B and sch 12.
Chapter One: Company Law Principles and Theory
It is important to consider company law theory and principles because they underpin the law.6 The corporate objective informs how and for what end directors manage the company and company law principles show the ideals the legislation and courts should include.7
I Important Company Law Principles
The company is important to the New Zealand economy. It is a vehicle for economic progression.8 The company and company law have this effect due to core doctrines.9
The modern company’s core features are perpetual life, separate legal identity, limited liability, transferability of shares, shared ownership by contributors of capital and centralised/specialised management (separation of ownership and control).10 Separate legal identity is a long-established principle integral to the success of the company.11 It is clearly affirmed in s 15 of the CA. Separate legal identity means companies are separate from all associated with it and have legal standing and personality – a juridical person.12 Assets belong
6 Helen Anderson “Creditors’ Rights of Recovery: Economic Theory, Corporate Jurisprudence and the Role of Fairness” [2006] MelbULawRw 1; (2006) 30 Melb. U. L. Rev. 1 at 1.
7 Kristin Van Zwieten “Disciplining the Directors of Insolvent Companies: Essay in Honour of Gabriel Moss QC” (2020) 33 I.I.J. 2 at 2.
8 Law Commission Company Law, a Discussion Paper (NZLC PP5, 1987) at [33]-[35]; and Len Sealy “Directors’ ‘Wider’ Responsibilities – Problems Conceptual, Practical and Procedural” (1987) 13 MonashULawRw 164 at 181; John Farrar, Sian Elias, Peter Watts and others Contemporary Issues in Company Law (Commerce Clearing House, Auckland, 1987) at 3; and Anderson, above n 3, at 1-2.
9 Law Commission Company Law Reform and Restatement (NZLC R9, 1989) at [22].
10 At 22; Law Commission, above n 8, at [31]-[33]; Reinier Kraakman, John Armour, Paul Davies and others The Anatomy of Corporate Law: A Comparative and Functional Approach (3rd ed, Oxford Unversity Press, Oxford, 2017) at 5; and Susan Watson and Lynne Taylor Corporate Law in New Zealand (1st ed, Thomson Reuters New Zealand, Auckland, 2018) at 4 and 15.
11 For more information on the development of separate legal identity and its’ impact on the company’s success see Watson and Taylor, above n 10, at 64-95; Ross Grantham and Charles Rickett Corporate Personality in the 20th Century (1st ed, Hart Publishing, Oxford, 1998) at 1-10; Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22 (HL); Macaura v Northern Assurance Co Ltd [1925] AC 619 (HL); Lee v Lee’s Air Farming Ltd [1961] NZLR 325 (PC); Sneha Mohanty and Vrinda Bhandari “The Evolution of the Separate Legal Personality Doctrine and Its Exceptions: A Comparative Analysis” (2011) 32 Comp.Law. 194; Susan Watson “The Corporate Legal Person” (2019) 19 J. Corp. Law Stud.137; and Susan Watson “How the Company Became an Entity: A New Understanding of Corporate Law” (2015) 120 J. Bus. Law. 1; and Phillip Lipton “ The Introduction of Limited Liability into the English and Australian Colonial Companies Acts: Inevitable Progression or Chaotic History?” (2018) 41 Melb Univ Law Rev 127.
12 Grantham and Rickett, above n 11, at 4-9; Salomon v A Salomon & Co Ltd, above n 11, at 30, 31, 33, 45, 51, 53, 54; Lee v Lee’s Air Farming Ltd, above n 11, at 426-429; Lynn Buckley “The Foundations of Governance: Implications of Entity Theory for Directors’ Duties and Corporate Sustainability” (2021) 25 J. Manag. Gov.
1385 at 1390; and Watson and Taylor, above n 10, at 16.
to the company, not shareholders nor creditors.13 This separation means directors, as the company’s agent, are not personally liable for commitments incurred by the company.14 The limitation of directors’ personal liability enables them to take risks beneficial to the company and economic development.15 Separate legal identity is therefore a crucial principle to uphold.
However, the corporate form is open to abuse.16 At the heart of commercial law is balancing efficiency and substantive fairness (fair allocation of responsibility).17 These are both objectives valued in the CA long title.18 This means the CA should provide checks on director behaviour to protect stakeholders from impropriety without reducing the utility of the company form for legitimate risk-taking (which separate legal identity encourages).19 Directors’ duties which hold directors personally liable for breaching their obligations are one of the major checks in the CA preventing improper behaviour. Duties are also a major inroad into separate legal identity. Directors’ duties should only include actions that go beyond legitimate risk-taking to avoid dissuading expert businesspeople taking directorships and risks.20 A directors’ duties purpose provision reaffirming the relevance of the CA’s dual- purpose to directors’ duties would assist the courts.
The solvency test is another core provision in the CA.21 It replaced the capital maintenance rule in the Companies Act 1955 as the tool preventing undercapitalisation (coupled with
13 Kraakman, Armour, Davies and others, above n 10, at 5; and Ten Pin Properties Ltd v Bowlarama (NZ) Ltd
HC Christchurch M655/89, 18 December 1989 at 2–3.
14 Kraakman, Armour, Davies and others, above n 10, at 12; Jason Harris “Director Liability for Insolvent Trading: Is the Cure Worse than the Disease?” (2009) 23 AJCL 1 at 2; and Susan Watson and Chris Noonan “The corporate shield: What happens to directors when companies fail?” (2005) Auckl.Univ.Law.Rev.1 27 at 27-28.
15 Law Commission, above n 9, at [22]; Helen Anderson “Directors’ Personal Liability to Creditors: Theory versus Tradition” (2003) 8 DeakinLawRw 209 at 217; Mohanty and Bhandari, above n 11, at 206; Harris, above
n 14, at 2; and Grantham and Rickett, above n 11, at 25.
16 Special Committee to Review the Companies Act Final Report of the Special Committee to Review the Companies Act (1973) at 187; and Andrew Keay “Wrongful Trading and the Liability of Company Directors: Theoretical Perspective” (2006) 25 Leg Stud 431at 457.
17 Michael Bos and Martin Wiseman "Directors' liabilities to creditors" (2003) NZLJ 262 at 262-263; Anderson, above n 3, at 8 and 56; and Anderson, above n 6, at 2-3.
18 Companies Act, long title; Farrar, Elias, Watts and others, above n 8, at 6; (15 December 1992) 532 NZPD 13111; Law Commission, above n 9, at [21], [23] and [69]; and Neil Campbell, Peter Watts, Kim Francis and others Morison’s Company and Securities Law (loose-leaf ed, LexisNexis) at [1.3].
19 Law Commission, above n 8, at [35]-[38].
20 Farrar, Elias, Watts and others, above n 8, at 71; Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [198]; Sealy, above n 8, at 180; Law Commission Company Law Reform: Transition and Revision (NZLC, R16, 1990) at 14-15; and Anderson, above n 6, at 2-3.
21 Companies Act, s 4; John Farrar and Doug Tennent “The Unfitness of Directors, Insolvency and the Consequences – Some Comparisons” (2005) 11 CanterLawRw 239 at 239; Watson and Taylor, above n 10, at 136; and Law Commission, above n 20, at 17-18.
directors’ duties) for the protection of the company, shareholders and creditors, particularly creditors as they rank ahead of shareholders for repayment on liquidation.22 The solvency test requires directors to be satisfied the company will pass the solvency test after all distributions of wealth from the company.23 The test has two limbs, cash flow (paying debts in the normal course of business) and balance sheet solvency (assets being greater than liabilities).24
In addition to the solvency test, the CA contains formal mechanisms to address the company’s position during financial strife.25 New Zealand (legislation) was part of the global movement towards valuing and focusing on a rescue culture.26 Rescue promotes economic growth beneficial for wider society.27 Parts 14 (compromises with creditors), 15 (Court approved arrangements, amalgamations or compromises) and 15A (voluntary administration) provide statutory procedures for rehabilitating companies in the vicinity of insolvency.28 Another option is informal restructuring – a contractually based arrangement which may include professional help, asset sales and compromises.29 If rescue efforts succeed and the company survives all stakeholders benefit. For example, creditors are paid and employees have jobs.30 A going concern company with goodwill, works in progress, ability to collect
22 Law Commission, above n 9, at [223]-[228] and [330]-[332]; Watson and Taylor, above n 10, at 952-953 and 955-958; Paul Heath and Michael Whale ed Heath and Whale on Insolvency (loose-leaf ed, LexisNexis) at [32.2.1]; Peter Fitzsimons “Australia and New Zealand on Different Corporate Paths” (1994) 8 OtagoLawRev 267 at 284-285; and (23 February 1993) 533 NZPD 13350.
23 Christopher Haynes “The Solvency Test: A New Era in Directorial Responsibility” [1996] AukULawRw 7; (1996) 8 Auckland U. L. Rev. 125 at 126-128; Watson and Taylor, above n 10, at 955-958; and Law Commission, above n 9, at [330]- [332].
24 Companies Act, s 4; for more detail on the solvency test in s 4 see Mike Ross Corporate Reconstructions: Strategies for Directors (CCH New Zealand, Auckland, 1999) at ch 7; Haynes, above n 23; and Seppo Villa “ Creditor Protection and the Application of the Solvency and Balance Sheet Tests under the Company Laws of Finland and New Zealand” (2008) 1.
25 Companies Act, pts 14, 15, 15A, 16; and Lynne Taylor and Grant Slevin The Law of Insolvency in New Zealand (Thomson Reuters, Wellington, 2016) at 14-16.
26 Law Commission Insolvency Law Reform: Promoting Trust and Confidence – An Advisory Report to the Ministry of Economic Development (NZLC, SP11, 2001) at 74-76; Sebastian Ellice “Is Voluntary Administration Failing Companies? An Investigation Into the Operation of Voluntary Administration in New Zealand from Inception To 2019” (2021) 52 VUWLR 29 at 8; Vanessa Finch Corporate Insolvency Law Perspectives and Principles (2nd ed, Cambridge University Press, Cambridge, 2009) at 253-254; Jan Adriaanse “The Uneasy Case for Bankruptcy Legislation and Business Rescue” (2014) 2 NIBLeJ 119 at 119-120; and Andrew Keay “Financially Distressed Companies, Restructuring and Creditors’ interests: what is a Director to do?” (2019) LMCLQ 297 at 228-230.
27 Harris, above n 14, at 6.
28 For more information see Companies Act, pts 14, 15 and 15A; Campbell, Watts, Francis and others, above n 18, at [47.2], [48.1] and [47.11]; Heath and Whale, above n 22, at ch 16 and 17; Ellice, above n 26, at 30-32; and Taylor and Slevin, above n 25, at 14.
29 Ross, above n 24, at 95; and Finch, above n 26, at 251-253.
30 Sealy, above n 8, at 186.
debts owed, and better asset sale values is more valuable than the assets which constitute the business.31 Whilst the CA supports rescue, this also depends on the judiciary’s decisions.32
The principles of certainty, whilst retaining flexibility to meet diverse situations are also important in company law.33 The CA was meant to make company law accessible and usable. But company law is not a field where finality is common due to the complex and unique situations meaning breadth is required to avoid lacunas.34 However, too much flexibility creates uncertainty, leading to procedural unfairness. Procedural unfairness exists where the law is unsettled by inconsistent legislation and unpredictable common law decisions based on intuition and fairness. Without coherence, a body of law becomes technical and relies on arbitrary distinctions to justify disparate outcomes. This means directors, creditors and shareholders do not know what to do.35 Certainty is vital to justice.
These are all important principles that should be present in company law. However, the balance between the oft-competing ideas is difficult to strike. It is questionable whether the current reckless trading duty upholds these doctrines.
II The Influence of the Corporate Objective
The corporate objective influences the interpretation of legal rules, how legislation is reformed and provides guidance impacting real-world governance.36 Theory on the corporate objective impacts whose interests’ directors consider when performing their duties and how.37 Given the ambiguity surrounding s 135 and calls for reform, such discussion is imperative.
31 Harris, above n 14, at 6.
32 Muir Hunter “The Nature and Functions of a Rescue Culture” (1999) 104 Com. L.J. 426 at 458
33 Farrar, Elias, Watts and others, above n 8, at 1; and Ross Grantham and Charles Rickett Company and Securities Law (Brookers, Wellington, 2002) at 40.
34 Law Commission, above n 8, at [15], [16], [19] [20], [26], [33], [47] and [121]-[126]; (15 December 1992) 532 NZPD, above n 18, at 13110; and Special Committee to Review the Companies Act, above n 16, at 121; and Farrar, Elias, Watts and others, above n 8, at 4.
35 Anderson, above n 3, at 4-6; and Anderson, above n 6, at 4 and 13.
36 Buckley, above n 12, at 1385; and Andrew Keay “Ascertaining the Corporate Objective: An Entity Maximisation and Sustainability Model” (2008) 71 Mod. L. Rev. 663 at 665-666.
37 PM Vasudev and Susan Watson Corporate Governance After the Financial Crisis (Cheltenham, United Kingdom, Northampton, 2012) at 5-6; and Edward Rock “For Whom is the Corporation Managed in 2020?: The Debate over Corporate Purpose” (2020) 515 ECGI 1 at 1.
One of the oldest unsolved debates in company law is the corporate objective.38 Shareholder primacy (SP), stakeholder theory (ST) and entity theory (ET) are the main competing paradigms.39
A Shareholder Primacy
SP is a traditional interpretation of the corporate objective.40 It grew from contrarianism and emphasises a private property-focused view of the company.41 SP views the corporate purpose (director’s responsibility) as maximising shareholder interests.42 The company is merely a nexus of contracts, a convenient legal fiction.43 This is justified by shareholders’ provision of capital making them owners, and their position as the last claimants making them residual risk-bearers. Thus, shareholders have the greatest interest in the company’s fortunes meaning they are incentivised to maximise profits. This leads to increased social wealth beneficial to all stakeholders.44 SP views directors as the shareholders’ agents45 – allocating ownership and control to shareholders.46 Monitoring and remuneration costs are incurred by shareholders to keep directors’ interests aligned with shareholders.47
However, SP is heavily criticised. Firstly, shareholders do not own the company, only shares in the company.48 Separate legal identity of the company is well-established (as
38 Law Commission, above n 8, at [206].
39 Vasudev and Watson, above n 37, at 5-6; and Debut Homes Limited (in liquidation) v Cooper, above n 2, at [28]-[31].
40 Henry Hansmann and Reinier Kraakman “The End of History for Corporate Law” (2001) 89 Geo.L.J. 439 at 440-441; Thomas Clarke “Deconstructing the Mythology of Shareholder Value: A Comment on Lynn Stout’s “The Shareholder Value Myth”” (2013) 3 Account. Econ. Law 15 at 27; and Andrew Keay and Rodoula Adamopoulou “Shareholder Value and UK Companies: A Positivist Inquiry” (2012) 13 Eur. Bus. Organ. Law Rev. 1 at 2.
41 Clarke, above n 40, at 31; John Farrar and Pamela Hanrahan Corporate Governance (1st ed, Lexis Nexis Australia, Australia, 2016) at 32-33.
42 Hansmann and Kraakman, above n 40, at 441, Watson and Taylor above n 10, at 50-51; and Peter Watts
Directors’ Powers and Duties (2nd ed, LexisNexis New Zealand, Wellington, 2015) At 10.
43 Stephen Bainbridge “Twilight in the Zone of Insolvency: Fiduciary Duty and Creditors of Troubled Companies - Presentation of Much Ado About Little? Directors' Fiduciary Duties in the Vicinity of Insolvency” (2007) 1 J. Bus. & Tech. L. 281At 283.
44 John Quinn “The Duty to Act in the Interests of the Company: Simply a Duty to Increase Shareholder Wealth?” (2015) 7 UCD Working Papers 1 at 1-3 and 6; Keay and Adamopoulou, above n 40, at 7-10; Keay, above n 36, at 667-669; and Watson and Taylor, above n 10, at 53.
45 Watson and Taylor above n 10, at 50; Anderson, above n 15, at 211; and Grantham and Rickett, above n 40, at 73.
46 Buckley, above n 12, at 1388.
47 Hansmann and Kraakman, above n 40, at 455-456; Quinn, above n 44, at 6; Companies Act, ss 104-109 and 165; Watson and Taylor above n 10, at 50; and Anderson, above n 15, at 211.
48 Macaura v Northern Assurance Co Ltd, above n 11, at 628; Ten Pin Properties Ltd v Bowlarama (NZ) Ltd,
above n 13, at 2–3; Watson and Taylor, above n 12, at 535.
abovementioned). This also negates directors being the shareholders’ agents, they are the company’s agents with powers conferred by statute.49 Nor are shareholders ultimate controllers, their powers are limited.50 Directors are the true controllers.51 Shareholders vulnerable position as residual claimants is overstated, liquidation negatively impacts many stakeholders52 and shareholders have special protections.53 SP also fails to recongise the diversity in shareholder constituencies. It does not provide any mechanism to balance shareholders’ diverging interests.54
SP’s focus has also been met with growing disapproval. Private shareholder centric governance is no longer acceptable given the power some companies possess.55 SP is also known for short-termism and excessive risk because it measures success by short-term targets like quarterly earnings, share value and dividends.56 As a result, it is closely linked to corporate collapses.57
The United Kingdom takes an enlightened shareholder value approach, a legal manifestation of SP. This tries to improve upon SP by including other stakeholders and focusing on long- term value.58 However, the goal of promoting shareholders over all others remains.59
Most SPs accept limited consideration of creditors. Under SP directors’ duties shift from being directly owed to shareholders to creditors during insolvency. This is because companies function on capital contributed by shareholders and creditors.60 During insolvency
49 Chris Noonan and Susan Watson “The Foundations of Corporate Governance in New Zealand: A Post- Contractualist View of the Role of Company Directors” (2007) 22 NZULR 649 at 5-6.
50 Noonan and Watson, above n 49, at 2; and Len Sealy “Director’s Duties Revisited” (2001) 22 Comp.Law 79 at 79; and Law Commission, above n 9, at [153]-[154].
51 Companies Act, ss 128 and 126; Watson and Taylor, above n 10, at 35, 533 and 282-284; and Noonan and
Watson, above n 49, at 3, 5-7.
52 Keay, above n 36, at 671; and Watson and Taylor, above n 10, at 51.
53 Law Commission, above n 9, at [196]-[199]; Quinn, above n 44, at 7; Watson and Taylor, above n 10, at 51;
and Companies Act, pts 7, 11 and 12, and ss 90, 140, 153, 156, 180, 164, and 165.
54 Law Commission, above n 8, at [250]; and Keay, above n 36, at 672.
55 Sealy, above n 8, at 169 -170; and Quinn, above n 44, at 21.
56 J. William Callison “Why a Fiduciary Duty Shift to Creditors of Insolvent Business Entities is Incorrect as a Matter of Theory and Practice” (2007) 1 J. Bus. & Tech. L. 431 at 435, 436 and 450.
57 Watson and Taylor, above n 10, at 51 and 54; Keay, above n 36, at 670-672; Keay and Adamopoulou, above n 40, at 6-7 and 21; and Quinn, above n 44, at 8.
58 Buckley, above n 12, at 1395-1397; and Companies Act 2006 (UK), s 172.
59 At 1397 and 13401; and Andrew Keay “Risk, Shareholder Pressure and Short-Termism in Financial Institutions: Does Enlightened Shareholder Value Offer a Panacea?” (2011) 5 Law Financial Mark. Rev. 435 at 440-444.
60 Callison, above n 56, at 431; Anderson, above n 15, at 219; Debut Homes Limited (in liquidation) v Cooper, above n 2, at [31]; Farrar and Hanrahan, above n 41, at 533-534; and for more discussion see Simone Sepe
creditors take shareholders’ place as the party with an equitable interest in the corporate assets because the company is trading with creditor money.61 There are two issues with this risk-shifting formulation. Firstly, the shift is based on creditors having a proprietary interest in the company, but no stakeholders own company assets as the company is a separate legal person.62 Secondly, shifting the duty upon financial conditions creates uncertainty on when it arises.63 It also means situations outside insolvency where director opportunism can arise, like where a company has outstanding debt, creditors are ignored.64
SP theory is flawed. SP has never been mandated in New Zealand and it does not reflect New Zealand company law.65
B Stakeholder Theory
The traditional competing model to SP is ST which holds the corporate objective should create value for all stakeholders.66 Whilst the wider socially conscious view of the corporate objective is more acceptable to society than SP, it is difficult to implement. ‘Stakeholder’ is too broad, directors must constantly balance competing interests, there is no framework for directors to make decisions, directors are given too much discretion and there is no accountability mechanism.67 Lastly, ST is unnecessary because stakeholders’ interests are protected elsewhere.68 Whilst the theory’s inclusive approach is attractive, it is unworkable.69
“Directors' Duty to Creditors and the Debt Contract” (2007) 1 J. Bus. & Tech. L. 553; Andrew Keay “Directors’ Duties to Creditors: Contractarian Concerns Relating to Efficiency and Over-Protection of Creditors” (2003) 66 Mod. L. Rev. 665 at 667 and 687-698.
61 Keay, above n 60, at 667-668; and Kenneth Hayne “Directors' Duties and a Company's Creditors” (2014) 38 MelbULawRw 795 at 802-803.
62 Anderson, above n 14, at 214; Hayne, above n 61, at 803; and Heath and Whale, above n 22, at [32.2.4]. 63 Callison, above n 56, at 449-450; and Andrew Keay “Formulating a Framework for Directors' Duties to Creditors: An Entity Maximisation Approach” (2005) 64 Cambridge L.J. 614 at 615.
64 Sepe, above n 60, at 577.
65 Lynn Stout “ On the Rise of Shareholder Primacy, Signs of Its Fall, and the Return of Managerialism (in the Closet)” (2013) 36 Seattle Univ. Law Rev. 1169 at 1184.
66 Watson and Taylor, above n 10, at 54; and Watts, above n 42, at 132.
67 Keay, above n 36, at 675-678; Quinn, above n 44, at 7-8; and Stephen Bainbridge “Much Ado About Little? Directors' Fiduciary Duties in the Vicinity of Insolvency” (2007) 1 J. Bus. & Tech. L. 335 at 354-355.
68 Law Commission, above n 9, at [194] and [286].
69 Keay, above n 36, at 675.
C Entity Theory
ET is a paradigm gaining traction.70 It has been endorsed in multiple jurisdictions,71 including Canada – a well-known entity orientated jurisdiction.72
Managerialism laid the foundations for this conception of the corporate objective which views the company as a separate juridical person with wider responsibilities to society.73 ET holds the corporate objective is to further the interests of the entity itself, protecting the company from abuse.74 Directors as the company’s agents must maximise the long-term value of the company and ensure its survival.75 Value maximisation is wide, it includes minimising and repaying debts, investing in the community and more. The second objective relates to financial sustainability. This involves avoiding insolvency, developing financial strength and creating strategies to address change.76 Risky actions are not legitimate if they endanger the company (unlike SP).77 But this would not prohibit legitimate risk-taking. An entity maximisation approach is attractive as it provides a happy medium between excessive risk and excessive caution. Furthermore, ET includes greater social responsibility without the drawbacks of balancing interests like ST as directors focus on the company’s interest.78 However, other groups are not disregarded, they are valued and considered when ascertaining the company’s interests and where they align with the company’s interests.79 This makes express reference to stakeholders in directors’ duties unnecessary as all stakeholders will be considered at a point in the company’s life.80 Therefore, ET benefits everyone.
70 Buckley, above n 12, at 1388-1389.
71 Anderson, above n 15, at 211-213; Hayne, above n 61, at 797-799; Keay, above n 36, at 682; Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC 239; Walker v Wimborne [1976] HCA 7; and Credit Lyonnais Bank Nederland, N.V. v. Pathe Communs. Corp., 215 A.3d 12150 (Del.Ch. 1991).
72 Watts, above n 42, at 264; Buckley, above n 12, at 1398-1401; Peoples Department Stores Inc. (trustee of) v Wise [2003] SCCA 133; and BCE Inc v 1976 Debentureholders [2008] SCCA 202.
73 Clarke, above n 40, at 29-30; Grantham and Rickett, above n 33, at 58-59; Quinn, above n 44, at 1-2; and
Watson and Taylor, above n 10, at 546, 59, 60 and 67.
74 Watson, above n 11, at 1 and 20; Watson and Taylor, above n 10, at 80 and 144; Keay, above n 36, at 663 and
6664; Anderson, above n 15, at 16; and Buckley, above n 12, at 1386 and 1389.
75 Keay, above n 36, at 678, 679 and 685-694; Buckley, above n 12, at 1387 and 1404; and Andrew Keay “Board Accountability and the Entity Maximization and Sustainability Approach” in Barnali Choudhury and Martin Petrin Understanding the Company – Corporate Governance and Theory (Cambridge University Press, Cambridge, 2017) 271 at 272-276.
76 Keay, above n 36, 685-694; Keay, above n 63, at 634; and Buckley, above n 12, at 1387 and 1404.
77 Callison, above n 56, at 435, 436 and 450.
78 Vasudev and Watson, above n 37, at 129-130; Keay, above n 63, at 638-640; and Watson and Taylor, above n 10, at 545-546.
79 Watson and Taylor, above n 10, at 545-546; for more discussion and examples of how ET decision-making looks, is different from SP and is beneficial for all stakeholders see Keay, above n 36, at 670 and 658-686.
80 Buckley, above n 12, at 1400.
This reasoning applies to creditors.81 The company’s and creditors’ interests overlap when considering actions during financial difficulties. ET means excessive risk-taking is impermissible as it would jeopardise the company. This matches creditor interests. When the company is insolvent there is also congruence. This is because for the company to continue it must be able to pay debts, which creditors want too.82 This view was enunciated in New Zealand by Cooke J in Nicholson v Permakraft when he stated directors’ duties are owed to the company which includes creditors in the vicinity of insolvency.83
However, there are criticisms of ET.84 Firstly, that ET gives directors too much discretion. However, discretion is unavoidable in any paradigm as company law (as abovementioned) requires flexibility.85 Furthermore, ET’s objectives are clear which provides guidelines for directors.86 It is also suggested ET provides no accountability mechanism. But, under ET directors are deterred by potential discipline, loss of income and reputation, performance- based remuneration mechanisms and monitoring each other.87 Secondly, directors are answerable to shareholders who still perform an accountability function.88 But, under ET shareholders act for the company.89 The criticisms of ET are minor.
New Zealand can be explained as an ET jurisdiction.90 It strongly affirms separate legal identity and related concepts like director control, the company’s immortality, the company’s ownership of its own assets and room for a wider long-term focus.91 Furthermore, Māori corporate governance and Tikanga concepts align with ET’s long-term focus and rescue
81 Anderson, above n 15, at 219; and Watts, above n 42, at 264.
82 Keay, above n 63, at 636-637.
83 Nicholson v Permakraft (NZ) Ltd [1985] NZCA 15; [1985] 1 NZLR 242 (CA) at 249; and Hayne, above n 61, at 797-798.
84 For more criticisms on ET being a ‘dangerous’ form of reification, incoherent and leaving directors owing duties to themselves see Bainbridge, above n 43, at 283; and Bainbridge, above n 67, at 352-353.
85 Keay, above n 63, at 645–646.
86 Quinn, above n 44, at 8-9.
87 Keay, above n 36, at 694 and 697-698.
88 Keay, above n 75, at 276 and 285-292; Law Commission, above n 8, at [153]-[154]; and Companies Act, pts 7, 11 and 12, and ss 90, 140, 153, 156, 180, 164, and 165.
89 Keay, above n 75, at 284.
90 Helen Winkelmann, Susan Glazebrook, and Ellen France, judges of the Supreme Court of New Zealand “Climate Change and the Law” (paper presented to the Asia Pacific Judicial Colloquium, Singapore, 2019) at [114]; further support is found in Te Urewera Act 2014 s 11; and Te Awa Tupua (Whanganui River Claims Settlement) Act 2017, s 12.
91 Grantham and Rickett, above n 33, at 56; Companies Act, ss 128 and 126; Watson and Taylor, above n 10, at 2-3, 35, 533 and 282-284; Noonan and Watson, above n 49, at 3, 5-7; Macaura v Northern Assurance Co Ltd, above n 11, at 628; and Ten Pin Properties Ltd v Bowlarama (NZ) Ltd, above n 13, at 2–3.
culture, supporting ET’s place in New Zealand.92 Acknowledgement of corporate personality concedes there is more to the company than contracting, meaning SP cannot theoretically stand (even if it may be applied in practice).93 Section 169 reinforces that shareholders are separate from the company by outlining different (direct) duties owed to shareholders and the company. Shareholders are owed direct duties because they are the accountability body, not because they are paramount.94 ST theorists have a stronger claim than SP theorists as the CA directors’ duties refer to the company, employees, shareholders and creditors.95 However, the Law Commission did not plan to include stakeholders in the company or company law, they had an entity primacy type approach in mind. These additional constituencies were intended to be subordinate and external to the company. The mention of creditors is only an indirect duty as it is ultimately owed to the company.96 Rather, the CA’s mention of other groups reflects the ET understanding that the company’s interests change over its life and the CA is providing guidance on when stakeholder interests overlap with the company’s.97 ET has the most explanatory power and promotes the best outcomes for companies in practice as it is fair and efficient.98
SP and ST have significant shortcomings. SP is unfair to stakeholders and encourages excessive risk-taking. ST is impractical and inefficient. ET resolves these issues as it is fair and efficient. ET also fits best with the CA. So, when discussing any amendments or interpretations of s 135, ET should be considered.
92 For more discussion on the intergenerational focus of Māori corporate governance, the growing Māori economy and tikanga concepts such as mauri, kaitiakitanga, rangatiratanga, manaakitanga, and whanaungatanga see Joseph Williams “Lex Aotearoa: An Heroic Attempt to Map the Māori Dimension in Modern New Zealand Law” (2013) 21Wai.L.Rev. 1; Stakeholder Governance – A Call to Review Directors’ Duties (New Zealand Institute of Directors and MinterEllisonRuddWatts, 2021); Linda Te Aho “Corporate Governance: Balancing Tikanaga Māori with Commercial Objectives” (2005) 8 Yearb.N.Z.jurisprudence 300; Rachel Jones, Erin Matariki Carr and Liam Stoneley Te Ao Māori Trends and Insights (Chapman Tripp, June 2017); Valmaine Toki Culture – the Foundation of Māori Governance (Chartered Secretaries New Zealand, 2013); Watson and Taylor, above n 10, at ch 7; and Mark Story “Māori Governance: Meeting the Cultural Challenge” (2005) 25 NZM 7.
93 Watson and Taylor, above n 10, at 533-535.
94 Companies Act, s 169(3); John Bovaird Brennan “The Companies Act 1993 and Common Law Directors’ Duties to Creditors: The Demise of Redundant Judicial Sympathies” (LLM Research Paper, University of Victoria, 1995) at 28; Ross Grantham “New Zealand – Reforming the Duties of Company Directors” (1991) 12 Comp.Law 27 at 28; and Law Commission, above n 8, at [149], [153]-[154].
95 Companies Act, s 90 132, 135, 136, 140 and 148.
96 Taylor, above n 1, at 171-172; Watts, above n 42, at 262; Vasudev and Watson, above n 37, at 130; and Law Commission, above n 9, at [192]-[195] and [284]-[286]; and Grantham, above n 94, at 27-28.
97 Watson and Taylor, above n 10, at 531 and 545-546. Grantham, above n 94, at 27-28; and Law Commission, above n 9, at [188]-[194].
98 Keay, above n 36, at 687; Winkelmann, Glazebrook, and France, above n 90, at [114].
Chapter Two: The Reckless Trading Duty – Purpose and Pitfalls
Most jurisdictions have implemented directors’ duties as one of the legal strategies that prevent directors taking improper risks which destroy the company’s financial position - harming the company and (existing and future)99 creditors.100 The duty can be implemented in multiple ways. Amongst the suite of possibilities is the reckless trading duty (known as a wrongful or insolvent trading duty in other jurisdictions).101 It is often coupled with other duties.102
The rationale behind these duties is directors and/or shareholders during financial distress face perverse incentives to take excessive risks.103 When a company enters the vicinity of insolvency, shareholders are predicted to favour high-risk high-reward strategies. This opportunistic conduct arises because once the company enters the zone of insolvency shareholders will only receive further financial benefit if the company returns to solvency because on liquidation, there is unlikely to be sufficient funds to cover shareholder claims who are last in the order of priorities.104 Limited liability emboldens shareholders to pursue risky projects because if ventures fail their personal assets are protected.105 The downside of large gambles (insolvency and insufficient funds to meet claims) falls on the company and creditors.106 However, in modern companies the concern of shareholder risk-taking only has
99 Watson and Taylor, above n 10, at 609; and Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [233].
100 Andrew Keay “The Shifting of Directors’ Duties in the Vicinity of Insolvency” (2015) 24 Int.Insolv.Rev 140 at 2-3; Aurelio Gurrea-Martínez “Towards an Optimal Model of Directors’ Duties in the Zone of Insolvency: An Economic and Comparative Approach” (2020) 22 SMU 1 at 4; and Anderson, above n 3, at 2-3; Taylor, above n 1, at 711-172; Brennan, above n 94, at 76-77; and Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [235].
101 For more discussion on other variations of director’s duties targeting value destructive conduct during financial difficulty see Oscar Couwenberg and Stephen J. Lubben “Solving creditor problems in the twilight zone: Superfluous law and inadequate private solutions” (2013) 34 Int.Rev.LawEcon. 61 at 61-65; Gurrea- Martínez, above n 100, at 11-30; Keay, above n 100, at 1-2; Helen Anderson “Directors’ Liability for Corporate Faults and Defaults – An International Comparison” (2009) 18 Pac.Rim.L&Pol’y.J. 1 at 22-230; and Amir Licht “My Creditor’s Keeper: Escalation of Commitment and Custodial Fiduciary Duties in the Vicinity of Insolvency” (2021) ECGI 1 at 27-31; and London School of Economics Study on Directors’ Duties and Liability (European Commission, April 2013).
102 Licht, above n 101, at 27-28; Lubben, above n 101, at 63; and Gurrea-Martínez, above n 100, at 23-24.
103 Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [231]; and Callison, above n 56, at 431-433.
104 Kristin Van Zwieten “Director Liability in Insolvency and its Vicinity” (2018) 38 Oxf. J. Leg. Stud.382 at 2, 5, 7-11; Gurrea-Martínez, above n 100, at 7-10; and Grantham and Rickett, above n 11, at 25.
105 Bos and Wiseman, above n 17, at 262-263; Kraakman, Armour, Davies and others, above n 40, at 111; and Bainbridge, above n 67, at 356-357.
106 Grantham and Rickett, above n 11, at 25; and Grantham and Rickett, above n 33, at 582.
traction where shareholders can influence directors who control the company.107 Shareholder and director interests align in closely held corporations where there is a controlling shareholder, a shareholder-director or directors have equity-based incentives. In these instances, a reckless trading duty on directors would impede shareholder opportunism.108 This concern is particularly relevant in New Zealand where small and medium enterprises (SMEs) comprise 97% of companies.109 This danger with SMEs has been illustrated in New Zealand where 80% of claims for directors’ breaching duties on insolvency were from SMEs.110
Directors are expected to engage in excessive risk-taking independent of shareholder influence during financial difficulty. Whilst managers are more risk-averse than shareholders as reputational and monetary incentives deter misbehaviour, when business deteriorates, directors have little to lose and are influenced by a ‘gambler’ strategy.111 Furthermore, separate legal identity creates a moral hazard as directors are not personally liable for debts and actions within their role.112 Directors may act to the company’s and creditors’ detriment by diluting assets, keeping non-viable companies alive, increasing the company’s liabilities by taking on more debt and substituting assets used in low-risk activities to pay for high-risk projects.113 This behaviour also stems from escalation of commitment. Escalation of commitment is where directors remain committed to their original choices even when it is no longer rational as the project is failing. Directors do this as they value perseverance, want to avoid failure, consider non-recoupable past expenditure, are influenced by family pride in closely held SMEs, have sentimental attachment, and/or are blinded by the herding mentality of the ‘ingroup’ (the board).114 As shareholders have already lost their investment, they are unlikely to stop directors’ risk-taking.115
107 Bainbridge, above n 67, at 358; Watson and Taylor, above n 10, at 607; and Kraakman, Armour, Davies and others, above n 40, at 112.
108 Anderson, above n 3, at 48, 50 and 51; Sepe, above n 60, at 564-565; and Licht, above n 101, at 2-3.
109 “Small Business” Ministry of Business, Innovation and Employment <www.mbie.govt.nz>.
110 Taylor, above n 1, at 185.
111 Sepe, above n 60, at 575-577; Keay, above n 60, at 668-669 and 693; and Keay, above n 100, at 6-7.
112 Anderson, above n 3, at 2; and Mike Ross Directors’ Liability and Company Solvency: the New Companies Act (Commerce Clearing House, Auckland, 1994) at 77.
113 Licht, above n 101, at 3-4: Anderson, above n 6, at 6; Sealy, above n 8, at 171-172; Grantham and Rickett, above n 33, at 588; and Kraakman, Armour, Davies and others, above n 10, at 111-113.
114 Licht, above n 101, at 6-12; Farrar and Hanrahan, above n 41, at 336, 444 and 445; and Andrew Keay
“Wrongful Trading: Problems and Proposals” (2014) 65 NILQ 63 at 18.
115 Watson and Taylor, above n 10, at 607; and Anderson, above n 15, at 17.
The sanction of a reckless trading duty discourages controllers from taking advantage of separate legal personality and ‘betting the house’ in the hopes of avoiding insolvency by imposing personal liability on directors for losses.116 The duty also provides a remedy for those harmed (particularly the company and creditors).117
Affording this protection to the company is met with little controversy. However, it is argued (mainly by some SP theorists) that creditors should not receive extra protection.118 Creditors are not vulnerable, the relationship is a voluntary business bargain and all bargains involve risks, incomplete information and inefficiencies. Creditors should protect themselves through contractual terms like high-interest rates, security or guarantees.119 Reckless trading duties give creditors a windfall, encouraging foolishness rather than pre-emptive protection.120
Whilst these criticisms hold weight with well-resourced, powerful and expert sophisticated creditors, many creditors cannot protect themselves.121 Disparities in bargaining power and information asymmetries prevent some creditors obtaining effective protection.122 For example, trade creditors have little choice over whether to deal with companies, they lack bargaining power to obtain contractual concessions and monitoring companies for a security or guarantee is unprofitable.123 Furthermore, contracts do not stop directors acting improperly.124 As a result, it is generally accepted creditors should be considered in directors’ duties.
116 Anderson, above n 15, at 17; Harris, above n 14, at 3; Van Zwieten, above n 104, at 2 and 9; Watts, above n 42, at 268; Keay, above n 16, at 456; Sefan HC Lo “ Proposals for Insolvent Trading Laws in Hong Kong: A Comparative Analysis” (2020) J.Int’l&Comp.L. 229 at 231-234; and Watson and Taylor, above n 10, at 606-
607.
117 Heath and Whale, above n 22, at [32.2.2]; and Roderick S Deane “Besieged by Duties – Wil the New Companies Act Work for Directors” (paper presented to the Company Law Conference, 1994) at 1; and Keay, above n 100, at 6.
118 Anderson, above n 7, at 4-5.
119 Deane, above n 117, at 2; Hayne, above n 61, at 805-810; Anili Hargovan and Timothy Todd “Financial Twilight Re-Appraisal: Ending the Judicially Created Quagmire of Fiduciary Duties to Creditors” (2016) 78 U. Pitt. L. Rev. 135, 150-51 at 163-179; and Keay, above n 60, at 15 and 28-30; Christopher Cowton Putting Creditors in Their Rightful Place: Corporate Governance and Business Ethics in the Light of Limited Liability (University of Huddersfield Business School) at 15-16.
120 Anderson, above n 6, at 4; and Bainbridge, above n 43, at 282.
121 Grantham and Rickett, above n 33, at 590 and 592; Law Commission, above n 8, at [309]; and Keay, above n 60, at 679-680.
122 Anderson, above n 6, at 5-6; and Keay, above n 60, at 698-699.
123 Keay, above n 16, at 451-453; Watson and Taylor, above n 10, at 608; and Grantham and Rickett, above n 11, at 32.
124 Anderson, above n 6, at 7; and Keay, above n 63, at 699.
Whilst reckless trading duties severe a valuable purpose, they suffer drawbacks so significant the duties are despised globally.125 Firstly reckless trading duties produce inefficiencies.126 Reckless trading duties diminish separate legal identity by holding directors personally liable, meaning directors are less likely to take risks or restructure.127 Instead directors may become risk-averse, decline directorships, resign at the first sign of trouble or prematurely liquidate.128 This limits benefits to society from business risk-taking and contributes to recessionary conditions.129 Company resources are also used inefficiently to meet the increased costs of insurance and director remuneration which rise with growing risks.130 This shows reckless trading duties have significant drawbacks.
Another drawback of reckless trading duties is they are unpredictable. Legislation is broad to allow flexibility, and courts do not often provide guideposts as breaches are fact-dependent.131 The uncertainty leads to risk-averse behaviour as directors do not know if their conduct will comply with the law.132
Conclusion
Whilst there are valid reasons for imposing reckless trading duties, a fair balance between creditors’, the company’s and directors’ interests is essential. It is important to avoid imposing uncertain and draconian liability on honest directors and ensure truly reckless and dishonest directors do not harm the company or creditors.133
125 Licht, above n 101, at 31.
126 Anderson, above n 15, at 216-217.
127 Sealy, above n 8, at 186; Grantham and Rickett, above n 33, at 589; and Harris, above n 14, at 7.
128 Watson and Taylor, above n 10, at 608; and Keay, above n 16, at 435-437 and 445-446.
129 Harris, above n 14, at 2.
130 Grantham and Rickett, above n 33, at 589; Anderson, above n 3, at 95; Hargovan and Todd, above n 119, at 159-160; and Andrew Keay “The Director’s Duty to Take into Account the Interests of Company Creditors: When is it Triggered?” (2001) 25 MelbULawRw 315 at 325.
131 Licht, above n 101, at 1 and 25; and Keay, above n 63, at 615.
132 Hargovan and Todd, above n 119, at 139 and 140; Keay, above n 130, at 806; Licht, above n 101, at 6, 33 and 34; Couwenberg and Lubben, above n 101, at 70-71; Keay, above n 26, at 305-311; Gurrea-Martínez, above n 100, at 17; and Keay, above n 63, at 615.
133 Grantham and Rickett, above n 33, at 588 and 590; and Keay, above n 16, at 447-449 and 460.
Chapter Three: The Reckless Trading Duty’s Development and Disappointment
I Section 135’s Development – Increasing Breadth and Burdens
A provision prohibiting fraudulent trading (committing the company to contracts the director knew could not be meet) was enacted in New Zealand in 1933 and was retained in the 1955 Act.134 It required directors directly compensate creditors.135 The provision mirrored s 275 of the 1929 United Kingdom Act, enacted following the 1926 Greene Report.136 In 1962 the United Kingdom’s Jenkins Committee noted the provision was too narrow and therefore did not effectively deter directors continuing hopelessly insolvent companies. The Committee recommended including reckless trading. This was taken up by Australia in 1971 and 1981 in New Zealand through revising s 320.137
The 1981 amendment preserved the fraudulent trading prohibition and added two limbs.138 The first limb was a negligence type obligation. It made directors liable for knowingly incurring company debts they did not honestly believe the company could meet. This first limb is largely repeated in s 136 of the CA.139 The second limb prohibited knowingly causing reckless trading (based on an objective standard). The wording is not repeated in s 135 of the CA but shares the same purpose.140 Section 320 only caught directors who had active roles and actual knowledge and applied to all business activity.141 Section 321 was a special enforcement provision, only a liquidator could bring the action.142 Compensation was held for
134 Companies Act 1955, s 320; Companies Act 1933, s 268; Watts, above n 42, at 269; Watson and Taylor, above n 10, at 605; and Law Commission, above n 9, at [515]; and Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [239].
135 Heath and Whale, above n 22, at [32.3].
136 Hugh Rennie and Peter Watts “Directors’ Duties and Shareholders’ Rights” (paper presented to the New Zealand Law Society, 1996) at 33; Watson and Taylor, above n 10, at 605; and Heath and Whale, above n 22, at [32.3]; and Re South Pacific Shipping Ltd (in liq) HC Christchurch CIV-1998-409-000069, 12 February 2004 at [117].
137 Grantham and Rickett, above n 33, at 592; Special Committee to Review the Companies Act, above n 16, at 181; and Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [243]; Watson and Taylor, above n 10, at 606; and Watts, above n 42, at 270.
138 Companies Act 1933, s 320(1)(a)-(c) and s 461D; and Michael Arthur “Reckless Trading Damages” (2013) NZLJ 51 at 52.
139 Watts, above n 42, at 270; and Grantham and Rickett, above n 33, at 592.
140 Watts, above n 42, at 271;and Re South Pacific Shipping Ltd (in liq), above n 136, at [113]-[115].
141 Grantham and Rickett, above n 33, at 593; and Brennan, above n 94, at 27-31.
142 Arthur, above n 138, at 52; and Heath and Whale, above n 22, at [32.3].
creditors143 and quantum was determined by considering causation, culpability and duration of trade.144
Meanwhile, decisions across the Commonwealth on directors’ duties reflected growing recognition of the vulnerability of the company and creditors during financial uncertainty. These cases recognised it was likely in such circumstances the company included creditors.145
In 1986 the Law Commission began reviewing company law culminating in the CA. The Law Commission departed from the Europeanised United Kingdom law and dense/outdated Australian law for the deregulatory North American approach.146 They were to recommend accessible legislation fit for present and future New Zealand that prevented abuse and encouraged efficiency. This included compiling and clarifying general directors’ duties.147 The Law Commission stated s 320 undermined the position of the company as a vehicle for business risk.148 They proposed cl 105, a general duty to the company owed throughout its life which prohibited directors transacting unless they believed actions would not involve unreasonable risk to the company failing the solvency test; and prohibited directors incurring obligations they did not believe the company could perform. Only after the company’s interests were met could directors consider creditor interests which were consistent with the company’s.149 In acknowledgement of risk-taking being a legitimate/beneficial activity cl 105 only imposed liability where directors "unreasonably" risked insolvency.150 This allowed
143 There is some disagreement on whether compensation was held for creditors generally or unsecured creditors specifically. For more discussion on this point see Grantham and Rickett, above n 33, at 592; Watson and Taylor, above n 10, at 605; and Heath and Whale, above n 22, at [32.3].
144 Watts, above n 42, at 287; Farrar and Tennent, above n 21, at 244; and Löwer v Traveller and Waller [1988] NZCA 36/04 at [78].
145 These judgments were directed at directors’ duty of good faith, discussed in chapter five. For more on the early cases recognising a shift in duty to creditors see the Law Commission, above n 8, at [210]; Hayne, above n 61, at 797-799; Heath and Whale, above n 22, at [32.2.3]; Keay, above n 100, at 5-10 and 14-20; Licht, above n 101, at 27-30; Walker v Wimborne, above n 71; Nicholson v Permakraft (NZ) Ltd, above n 83; Peoples Department Stores Inc. (trustee of) v Wise, above n 72; Credit Lyonnais Bank Nederland, N.V. v. Pathe Communs. Corp., above n 71; West Mercia Safetywear Ltd v Dodd [1988] BCLC 250 (CA); and Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 (NSWCA).
146 Law Commission, above n 9, at [29]-[33] and [36]-[42]; and John Farrar Corporate Governance – Theories,
Principles and Practice (3rd ed, Oxford University Press, Victoria, 2008) at 16-17.
147 Special Committee to Review the Companies Act, above n 16, at 10-11; Law Commission, above n 9, at ii and [184]-[187]; (23 February 1993) 533 NZPD, above n 27, at 13351-13352; and Watson and Taylor, above n
10, at 132-133.
148 Law Commission, above n 9, at [516].
149 At [515]-[518] and 241-242; and Watts, above n 42, at 264-265.
150 Law Commission, above n 9, at [516]; and Watson and Taylor, above n 10, at 615.
reasonable risks, and trading whilst insolvent was not wrong.151 It captured the dual-purpose of protection and efficiency in the CA’s long title.
Clause 105 was not enacted. For the Companies Bill the Justice Department instead included cl 113 which prohibited directors agreeing, causing or allowing the business of a company being carried on recklessly (indifference and gross negligence causing undesirable outcomes).152 This provision had potential as it comes close to what the law should be aiming at – grossly improper trading after insolvency.153 The reckless trading duty was changed for the final time by the Justice and Law Reform Select Committee to clarify ‘reckless trading’. Rather than defining the term, ‘recklessly’ was replaced with “in a manner likely to create a substantial risk of serious loss to the creditors”. The Committee believed the words reflected judicial interpretation as it is a modified version of Bisson J’s judgment in Thompson v Innes.154 They felt this was “easy to interpret and...logical”.155 The Committee still viewed the provision as prohibiting reckless trading, applying throughout the company’s life and owed to the company. It is also not a fiduciary duty and is an objective standard.156 Notable differences from the old provision are the shift from what directors know to what directors “agree to”, “cause or allow” and focusing on the company rather than creditors. Knowledge was omitted to include ignorant directors.157
Provisions related to s 135 in the CA are ss 131 (duty to act in good faith in the company’s best interests) 136 (duty not to incur obligations the company cannot meet), 380 (criminal fraudulent trading), 138 (general defence for relying on information from others), and 301 (procedural shortcut for a liquidator, creditor or shareholder bringing a s 135 breach
151 Watts, above n 42, at 271; Rennie and Watts, above n 136, at 32; and David Tompkins “Directing the Directors: the Duties of Directors under the Companies Act 1993” (1994) 2 WkoLawRw 13 at 21.
152 Companies Bill 1900 (50-1), cl 113; and Tompkins, above n 151, at 14-15.
153 Rennie and Watts, above n 136, at 32.
154 Companies Bill 1900 (50-1) (Select Committee Report) at 6; Re South Pacific Shipping Ltd (in liq), above n 136, at [118]; and Thompson v Innes (1985) 2 NZCLC 99,463 (HC) at 99,472; and Watson and Taylor, above n 10, at 612-613 and 615.
155 (15 December 1992) 532 NZPD, above n 18, at 13112; and (23 February 1993) 533 NZPD, above n 22, at
13364-13366.
156 Companies Bill 1900 (50-1) (Select Committee Report), above n 154, at 6; Madsen-Ries and Vance v Petera
[2015] NZHC 538 at [25]; Companies Act, s 169(3); Grantham and Rickett, above n 42, at 3; Taylor, above n 1,
at 171-172.
157 For more in-depth discussion on the differences between s 320 Companies Act 1955 and s 135 Companies Act 1993 see Grantham and Rickett, above n 33, at 615; Paul Davies “Directors’ Creditor-Regarding Duties in Respect of Trading Decisions Taken in the Vicinity of Insolvency” (2006) 7 Eur. Bus. Organ. Law Rev. 301 at 333-334; Brennan, above n 94, at 41-43; Watts, above n 42, at 276; and Heath and Whale, above n 22, at [32.3.3].
claim/inquiry to the High Court).158 Under s 301 courts also have broad discretion to order directors contribute sums as they think just.159 Any compensation under s 301 falls into the pool of company assets.160 Importantly, sch 7 cl 1(1)(e) gives unsecured creditors preferential right to repayment of costs and their unsecured debt if they provide funding for a claim.161 This helps s 135 achieve the aspect of the reckless trading duty rationale of protecting unsecured creditors. Section 135 claims can also be brought as ordinary actions for breach of statutory duties, an injunction or derivative action by the company, liquidator and shareholders respectively.162
Whilst the CA is a hybrid between the Law Commission’s deregulatory law and economics approach and the Department of Justice’s regulatory approach, s 135’s high objective standard is a compromise in favour of the conservative approach.163
II Extensive Criticism of Section 135
No other provision in the CA has attracted the degree of criticism directed at s 135.164 It suffers typical reckless trading duty shortfalls.165 The phrase “substantial risk of serious loss” has been the primary concern.166
There has been significant criticism of the legislative process and confusing drafting.167 Section 135’s incoherence stems from the Law Commission’s and Justice Department’s
158 Chapter five discusses ss 131, 136 and 137 of the Companies Act 1993; Companies Act, ss 380, 138 and 301; Bos and Wiseman, above n 17, at 264; Harris, above n 14, at 10-11; and Watson and Taylor, above n 10, 650- 651.
159 Watson and Taylor, above n 10, at 146, 609-610, and 747-749; and Goatlands ltd (in liq) v Borrell HC Hamilton CIV-2005-419-1643, 14 December 2010 at [119]-[121]; Mason v Lewis, above n 4, at [18].
160 Grantham and Rickett, above n 33, at 593; Watts, above n 42, at 286; and Arthur, above n 138, at 51.
161 Companies Act, sch 7 cl 1(1)(e); and Taylor, above n 1, at 179.
162 Companies Act, ss 164 and 165; Heath and Whale, above n 22, at [32.3.6]; Watts, above n 42, at 286; and Farrar and Tennent, above n 21, at 244-245. Other relevant provisions are Companies Act, s 383 under which the Court has power to disqualify a director, including for breach of s 135 and Financial Markets Authority Act 2011, s 34 under which the Financial Markets Authority has been able to exercise a right of civil action a listed company has against its directors for breach of duty
163 Grantham and Rickett, above n 33, at 38-40; Tompkins, above n 151, at 14; Sealy, above n 50, at 82-83; Watson and Taylor, above n 10, at 132; Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [252]; and (15 December 1992) 532 NZPD, above n 18, at 13108.
164 Watson and Taylor, above n 10, at 611; Deane, above n 117, at 1; Rennie and Watts, above n 136, at 31; and
Re South Pacific Shipping Ltd (in liq), above n 136, at [128].
165 Discussed in chapter two.
166 Campbell, Watts, Francis and others, above n 18, at [24.17].
167 John Farrar “Directors’ Duties and Corporate Governance in Troubled Companies” (2001) 8 CanterLawRw 99 at 110-113; and Re South Pacific Shipping Ltd (in liq), above n 136, at [128].
opposing approaches and various changes.168 For example, s 135 refers to loss to creditors but s 169(3) says the duty is owed to the company, s 135 does not mention recklessness in its body but is called “reckless trading”, later changes increased directors’ liability under s 135 meaning it may not strike the balance in the long title, it applies before insolvency but it is not clear how or why a creditor (the stakeholder stated in the provision) would enforce s 135 if they are being paid.169 Commentators felt later changes were based on “feelgood intuition” by a legislature disinterested in commercial law.170 It is not easy to understand why a carefully crafted reform from the expert and independent Law Commission would be re- examined by the Justice Department.171 As a result of the process and drafting, s 135 is incoherent.172
Commentators have been particularly critical of the provision including Bisson J’s test.173 The test was based on Diplock LJ’s objective test for recklessness in criminal law, which included inadvertence to risk of harm and equated recklessness with ordinary negligence.174 The test was disowned in New Zealand and by English courts who preferred a subjective standard and gross negligence.175 It is unfair that a widely criticised and disregarded criminal law test provides the standard of civil liability for directors’ duties.176 Furthermore, the strict test in s 135 does not capture the tone of Bisson J’s judgment and common law. Section 320 case law shows consideration of commercial reality and business judgment.177 Bisson J required a higher degree of blameworthiness than the excerpt, as a company being “unable to pay...debts...does not...prove recklessness...it is attempting this course, without a reasonable prospect of success”.178 In addition, the old case law focused on insolvency and
168 Tompkins, above n 151, at 14-15.
169 Companies Act, ss 169(3) and 135; Heath and Whale, above n 22, at [32.2] and [32.3]; and Brennan, above n 94, at 41-42.
170 Deane, above n 117, at 8-9.
171 Tompkins, above n 151, at 14-15.
172 Farrar, above n 167, at 111-112.
173 Thompson v Innes, above n 154, at 99,470-99,472.
174 Watson and Taylor, above n 10, at 612; Rennie and Watts, above n 136, at 33; and R v Lawrence (Stephen)
[1982] AC 510 (HL) at 526.
175 Watts, above n 42, at 271; Heath and Whale, above n 22, at [32.3.3]; and R v Harney [1987] NZCA 86; [1987] 2 NZLR 576
(CA) at 579.
176 Heath and Whale, above n 22, at [32.3.3]; and Re South Pacific Shipping Ltd (in liq), above n 136, at [119]. 177 Rennie and Watts, above n 136, at 33; Deane, above n 117, at 2; Watson and Taylor, above n 10, at 613; Re South Pacific Shipping Ltd (in liq), above n 136, at [13]-[126]; and Re Lake Tekapo Motor Inn Ltd (in liq) [1987] NZHC 122; (1987) 3 NZCLC 100,156 (HC) at 100,171-100,172; Re Petherick Exclusive Fashions Ltd (in liq) (1987) 3 NZCLC 99,946 (HC) at 99,959; and Re Bennett, Keane & White Ltd (in liq) (No 2) (1988) 4 NZCLC 64,317 (HC) at p 64,333.
178 Thompson v Innes, above n 154, at 99,468.
creditors, whereas s 135 is a general duty owed to the company throughout its life. Therefore, the haphazard drafting does not reflect the tenor of judicial opinion as hoped.
As a result, s 135 is very strict.179 The broad literal wording, “likely to create a substantial risk of serious loss to the company’s creditors” prima facie imposes strict liability resembling mere negligence, not true recklessness (fraudulent improper conduct).180 This does not allow balancing risk and reward, nor consideration of important subjective factors. This subverts the distinction between legitimate and non-legitimate risk-taking that is part of normal business.181 Thus, s 135 is almost a warranty of solvency.182 This means s 135’s plain wording does not achieve the CA’s purpose of balancing shareholder/creditor protection with encouraging beneficial risks.183 As a result, New Zealand’s reckless trading duty is seen as one of the most draconian approaches.184
However, commentators argued other interpretations are available. This ties into another major criticism of s 135, the clumsy and elusive language.185 “Substantial” is a variable expression implying a 10-30% chance of occurrence.186 It is unclear if “loss” should be considered regarding particular creditors, as part of the overall debt against the group or something else.187 Some commentators believe the long title and vagueness enables an interpretation which allows risk of loss commensurate to gain. Thereby only capturing truly reckless behaviour.188 Ross supported this interpretation and further stated it requires a sober assessment of the company's future income based on reasonable assumptions. He considered serious loss to creditors meant inability to pay debts.189 However, Watts questions whether the long title justifies this pragmatic gloss as nothing indicates the risk-taking purpose outweighs the purpose of protecting creditors/shareholders. The wording is plain, the
179 Grantham and Rickett, above n 33, at 592.
180 Heath and Whale, above n 22, at [32.3]; Watts, above n 42, at 272; and Davies, above n 157, at 333-334.
181 Deane, above n 117, at 2; Grantham and Rickett, above n 33, at 614; Bos and Wiseman, above n 17, at 262 and 267; Farrar and Tennent, above n 21, at 3-4; and Watson and Taylor, above n 10, at 612.
182 Rennie and Watts, above n 136, at 35.
183 Taylor and Watson, above n 10, at 608; Grantham and Rickett, above n 33, at 59; and Michael Arthur and Jacque Lethbridge “In short: Debut Homes ltd – Implications for Directors” (paper presented to New Zealand Law Society Council of Legal Education, Auckland, December 2020) at 19.
184 Farrar, above n 167, at 99 and 111.
185 Deane, above n 117, at 1; and Bos and Wiseman, above n 17, at 264 and 266.
186 Ross, above n 24, at 39.
187Heath and Whale, above n 22, at [32.3].
188 Brian Gould “Director’s Personal Liability – Assesses the Likely Impact of s 135 Companies Act 1993” (1996) NZLJ 437 at 437-438; and Farrar, above n 167, at 99 and 176; and Tompkins, above n 151, at 22.
189 Ross, above n 24, at 40.
meaning is simply unjust.190 However, the Law Commission stated those concerned directors’ duties were too onerous must note the importance of references to business judgement and risk in the long title. This shows the Law Commission intended the long title to be used as context for interpreting (down) directors’ duties.191 The vague terms mean directors may struggle to know what to do ex post.192
Section 135 also does not outline how to resolve creditors’ diverging interests.193 Creditors have different preferences in the zone of insolvency. For example, preferential creditors may prefer conservative decisions minimising the risk of asset dilution but unsecured creditors may prefer risky actions which may increase the funds available to repay them.194 Section 135 provides no direction on what directors should do if actions mean some creditors suffer but others benefit.195 Owing a duty to different persons with opposing interests fragments the duty so it ultimately amounts to a vague obligation to be fair.196 Section 135 is further fragmented because the company’s interests must also be considered.197 “Loss to creditors” conflicts with and diminishes the responsibility to the company as the ultimate beneficiary.
The uncertainty surrounding s 135 means the courts are relied upon for guidance. This means the goal of the CA being a source of first recourse was ineffective for s 135.198 Directors hoped judges could ‘make it work’.199 However, the judiciary’s ability to ‘fix’ the misconceived section is not limitless.200 Commentators at the time of enactment and today remain concerned the section’s breadth means it is susceptible to misapplication by commercially inexperienced judges.201 There is also concern judges may apply hindsight bias, attributing an erroneously high likelihood to failure because it occurred.202 But it is difficult
190 Watts, above n 42, at 273-274; and Grantham and Rickett, above n 33, at 614.
191 Law Commission, above n 20, at 15.
192 Bos and Wiseman, above n 17, at 264 and 266.
193 Watts, above n 42, at 278; and Callison, above n 56, at 450.
194 Keay, above n 63, at 629-633.
195 Watts, above n 42, at 278; and Sealy, above n 8, at 178.
196 Keay, above n 63, at 615.
197 Companies Act, s 169(3).
198 Grantham and Rickett, above n 33, at 613; Deane, above n 117, at 2; and Tompkins, above n 151, at 21.
199 Deane, above n 117, at 1 and 10.
200 Farrar and Hanrahan, above n 41, at 568 and 571-572.
201 At 567; Watson and Taylor, above n 10, at 608; and Andrew Keay, Joan Loughrey and others “Reviewing Directors’ Business Judgements: Views from the Field” (2020) 47 J.L.& Soc.639 at 642-645.
202 Keay, above n 16, at 439-442; Keay, Loughrey and others, above n 201, at 656-661; and Bos and Wiseman, above n 17, at 268.
for directors to make decisions in the moment, especially regarding the company’s financial state.203
Conclusion
Section 135’s wording is uncertain and potentially draconian, leading to the efficiency stifling concerns discussed in chapter two.204 Honest business judgment that balances risk and return should not be inhibited.205
203 For further discussion on the difficulty of identifying insolvency, the zone of insolvency and the different types of insolvency see Hargovan and Todd, above n 119, at 151-157; and Andrew Keay “Directors Taking into Account Creditors’ Interests” (2003) 24 Comp.Law 300 at 303-306; and Keay, above n 26, at 300-301.
204 Deane, above n 117, at 2; and Grantham and Rickett, above n 33, at 614; and Bos and Wiseman, above n 17, at 262 and 267.
205 Farrar, above n 167, at 111-112.
Chapter Four: Section 135 and the Judiciary – From Pragmatic to Problematic
What a director must do to comply with s 135 can only be determined by referring to case law.206 Most s 135 breach claims are brought by liquidators under s 301.207
There are some things generally agreed upon by the courts. The duty is owed to the company, it is not a fiduciary duty, the test is objective208 and ignorant directors fall within s 135.209 Furthermore, s 138 is very narrow.210
However, there is substantial judicial disagreement over the key term of the provision, “substantial risk of serious loss”.211 Case law has oscillated between a stringent and pragmatic approach to s 135.212 The approach to compensation also remains uncertain.
206 Watson and Taylor, above n 10, at 616.
207 Arthur, above n 138, at 51.
208 Examples of this consensus can be found in Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [218] and [262]; Debut Homes Limited (in liquidation) v Cooper, above n 2, at [159]; Fatupaito v Bates [2001] NZHC 401; [2001] 3 NZLR 386 at [67]; Mason v Lewis, above n 4, at [50]-[51]; and Linda Howes, Stephen Revill and Kath Clark Company Law (loose-leaf ed, Thomson Reuters) at [CA135.03].
209 Examples of this consensus can be found in Grant v Johnston [2016] NZCA 157 at [38]; Mason v Lewis,
above n 4, at [53]-[55] and [83] and [115]; and Howes, Revill and Clark, above n 208, at [CA135.05].
210 Mason v Lewis, above n 4, at [77]; Debut Homes Limited (in liquidation) v Cooper, above n 2, at [120]-[122] and [126]-[127]; and Howes, Revill and Clark, above n 208, at [CA135.03].
211 Heath and Whale, above n 22, at [32.1].
212 Farrar, above n 146, at 171.
213 Watson and Taylor, above n 10, at 616; and Re South Pacific Shipping Ltd (in liq), above n 136, at [127]- [129].
214 Discussed in chapter three.
215 Fatupaito v Bates, above n 208, at [67] and [70]; Watts, above n 42, at 273; and Heath and Whale, above n 22, at [32.3.3] and [32.3.4].
216 Watson and Taylor, above n 10, at 614.
strict interpretation was problematic, as risk is implicit in business and failure is rarely negligible.217 William Young J instead suggested “substantial risk” and “serious loss” were met if trading risks were ‘illegitimate’, supported by the long title.218 He also outlined considerations for determining legitimacy. These included creditor knowledge, corrective strategies used and that a company does not need to cease the moment it becomes balance sheet insolvent, trade may continue for a few months whilst implementing corrective measures.219 This recognises directors cannot predict the future (regarding salvage). William Young J’s approach mitigated the harsh plain wording and moved the test towards true recklessness.220 Uncertainty followed on which approach to take.
Mason was the next significant case. It became the orthodox approach.221 Rather than a close textual analysis, the Court summarised s 135’s “essential pillars” in light of the long title and s 135 criticisms. The duty is owed to the company, is objective, focuses on whether the manner of business as a whole creates substantial risk of serious loss (“substantial risk” as defined in Fatupaito above), requires a sober assessment of the company’s prospects on troubled waters and practicing minimum care, skill and diligence by understanding relevant information and acting on it as a reasonable director would.222 The Court also affirmed the Re South Pacific distinction between legitimate and illegitimate business risks and noted this distinction and s 301 remedial discretion mitigates s 135’s strictness.223 But, ss 135 and 301 should not be conflated.224 This pragmatic approach appears to take inspiration from the Law Commission’s cl 105. The subsequent courts favoured Mason’s pragmatic test.225 Downs J summarised the judiciary’s position “Business is...risky...directors must be entitled to some
217 Re South Pacific Shipping Ltd (in liq), above n 136, at [120].
218 At, [123]-[124]; and Watts, above n 42, at 273.
219 Re South Pacific Shipping Ltd (in liq), above n 136, at [125].
220 Howes, Revill and Clark, above n 208, at [CA135.01].
221 Mason v Lewis, above n 4; Watson and Taylor, above n 10, at 622-623; and Heath and Whale, above n 22, at [32.3.4].
222 Mason v Lewis, above n 4, at [45]-[51]; and Watson and Taylor, above n 10, at 619.
223 Companies Act, s 301; and Mason v Lewis, above n 4, at [45]-[49] and [55].
224 At [51].
225 Some examples of courts taking the pragmatic approach, including the legitimate-illegitimate distinction are Grant v Johnston, above n 209, at [36]-[37] and [166]-[169]; Mountfort v Tasman Pacific Airlines of NZ Ltd [2005] NZHC 514; [2006] 1 NZLR 104 (HC) at [25] and [31]; Delegat v Norman [2012] NZHC 2358 at [77] and [105]; Goatlands ltd (in liq) v Borrell, above n 159, at [31]-[47]; Rowmata Holdings Ltd (in liq) v Hildred [2013] NZHC 2435 at [81]- [83] and [88]; Allan McRae “Reckless Trading” (2019) NZLJ 349 at 349; and Howes, Revill and Clark, above n 208, at [CA135.01].
margin of appreciation in the way a company’s affairs are managed. Ex post...analysis is...easy – making corporate decisions...is not. However, there is risk and risk.” 226
Compensation under s 301(1) was also settled in the early period.227 Section 301 is compensatory.228 In extreme cases, compensation was for all losses.229 However, the orthodox net deterioration approach compensates creditors for loss suffered from the point the director breached their duty to the date of liquidation. The courts considered causation, culpability and duration of breaches.230 Generally, different successful claims could be subject to additional award.231
The sober assessment requirement and damages calculation meant the financial position of the company (onset of (a type of) insolvency and when a company should have ceased) became integral to assessing liability.232
Typical successful claims were where directors allowed continued trade knowing the company was hopelessly insolvent making loss to creditors inevitable,233 self-dealing which risked solvency,234 director’s entering obligations without sufficient finances235 and failure to repay tax debts, as tax payments are only meant to be held for a short period so failing to pay
226 Tim Conder and David Fraundorfer “Trade Better” (2019) NZLJ 148 at 148; and Madsen-Ries v Greenhill
[2016] NZHC 3188 at [70].
227 Watson and Taylor, above n 10, 629-630 and 631-635; Watts, above n 42, at 287-289; Mike Ross “Assessing Damages for Reckless Trading” (2002) NZLJ 178 at 178-179; and Heath and Whale, above n 22, at [32.3.6].
228 Conder and Fraundorfer, above n 226, at 149 and 151; and Debut Homes Limited (in liquidation) v Cooper, above n 2, at [172].
229 Goatlands ltd (in liq) v Borrell, above n 159 at [120]; and Ross, above n 227 at 178.
230 Mason v Lewis, above n 4, at [109]-[118]; Löwer v Traveller and Waller, above n 144, at [78]-[79]; Conder and Fraundorfer, above n 226, at 151-152; Arthur, above n 138, at 51; and Watson and Taylor, above n 10, at 630-631.
231 Watson and Taylor, above n 10, at 632.
232 Harris, above n 14, at 10; Taylor, above n 1, at 176; and Mason v Lewis, above n 4, at [109]-[110]; McRae, above n 225, at 350-351; and Watson and Taylor, above n 10, at 604.
233 Examples include Nippon Express (New Zealand) Ltd v Woodward (1998) 8 NZCLC 261,765 (HC) at 261,773-261,774; Re Hilltop Group Ltd (in liq) (2001) 9 NZCLC 262,477 (HC) at [46]; and Benchmark Building Supplies Ltd v Jackson (2001) 9 NZCLC 262,612 (HC) at [40] and [51]-[52]. This ‘category’ is discussed in Watson and Taylor, above n 10, at 617-618; and Conder and Fraundorfer, above n 226, at 150. 234 Examples include Kings Wharf Coldstore Ltd (in rec and in liq) v Wilson [2005] NZHC 283; (2005) 2 NZCCLR 1042 (HC), at
[67] and [68]; Re Gellert Developments Ltd (in liq) (2002) 9 NZCLC 262,942 (HC) at [18]-[19] and [43]; and
Madsen-Ries and Vance v Petera, above n 156, at [51]-[71].
235 Examples include Cool Cars (Wholesale) Ltd (in liq) v Sharma [2014] NZHC 256 at [20]- [23]; and Goatlands ltd (in liq) v Borrell, above n 159, at [77]-[89]; and Ocean Boulevard Properties Ltd v Everest (2000) 8 NZCLC 262,289 at 262,291. This ‘category’ is discussed in Allan McRae “Reckless Trading” (2020) NZLJ 30 at 31-32; and Farrar and Tennent, above n 21, at 243-244.
indicates trouble.236 These cases held directors liable in instances where one would expect liability to arise for truly reckless behaviour – finding the proper target of s 135.
The courts’ pragmatic interpretation of the provision abated commentators’ fears.237 The CA’s dual-purpose was considered, and the entity focus met. Whilst the early position seemed satisfactory, uncertainty and room for manoeuvre still followed Mason due to citing the conflicting Re South Pacific Shipping and Fatupaito judgments with approval, the broad provision, lack of close textual analysis, and fact-dependent nature of the approach.238
II Debut and Mainzeal: The Pragmatic Approach Abandoned (But Not Forgotten)
The precarity of relying on the goodwill of the judiciary to read down the drafting through reference to the long title, and understand commercial reality was shown by Debut and Mainzeal.239
A Debut Homes
Debut was a property development company. Cooper was the sole director and a shareholder (with his wife). Debut had two financiers, BNZ and JT Jamieson. The loans were secured by mortgages Cooper personally guaranteed. His family trust was also a lender. So, Cooper had conflicting interests. From 2009 Debut was balance sheet insolvent but paid debts through shareholder advances. However, by October 2012 Debut failed to pay debts.240 On 6 November 2012, Cooper discussed options with Debut’s accountant. Cooper did not consider Debut was “salvageable” and decided Debut would cease after completing and selling the remaining properties, rather than liquidate immediately. This was projected to create a$170,000 surplus for paying financiers. But, excluded GST/interest, Cooper knew trading would lead to a GST shortfall.241 After the projects were completed the Inland Revenue (IR)
236 Examples include Rowmata Holdings Ltd (in liq) v Hildred, above n 225, at [96]; Goatlands ltd (in liq) v Borrell, above n 159, at [77]-[89]; and Syntax Holdings (Auckland) Ltd (in liq) v Bishop [2013] NZHC 2171 at [21]. This ‘category’ is discussed in Howes, Revill and Clark, above n 208, at [CA135.04].
237 Discussed in chapter three; and Davies, above n 157, at 334.
238 Taylor, above n 1, at 175; and Watts, above n 42, at at 275.
239 Peter Watts "Debut Homes in the Supreme Court—a Product of the Vicarage?” (2020) CSLB 107 at 4; and Heath and Whale, above n 22, at [32.3.3].
240 Debut Homes Limited (in liquidation) v Cooper, above n 2, at [8]-[9], [18], [20], [22] and [117].
241 At [12]-[13], [15]-[17], [19], [22]-[23] and [70].
placed Debut in liquidation with approximately $450,000 GST owing.242 If the houses had been sold partially completed, claims on liquidation would have been higher.243 The liquidators brought a claim under s 301, alleging breaches of ss 131, 135 and 136.244
1 The Decisions
In the High Court Hinton J found Cooper breached s 135 as continuing trade was an illegitimate substantial risk as it increased debt to the IR, which Debut was unable to pay.245 Cooper could not rely on the accountant’s advice as a defence under s 138, if it was reasonable there would be no breach of duty.246 Hinton J applied the net deterioration approach to compensation arriving at $280,000.247 Hinton J’s judgment was harsh on the director.248
The Court of Appeal overturned the High Court’s decision. They followed (and embellished) the orthodox pragmatic approach.249 The Court analysed the provision in light of the long title.250 They emphasised directors have wide discretion in matters of business judgment, judges must avoid hindsight bias and risk is legitimate where commensurate to potential advantage.251 The Court also reinforced liability does not arise simply from continued trading after insolvency – it is fact dependent.252 The Court of Appeal held Debut’s continued trade was based on a sober assessment, was a sensible business decision, and likely to improve return rather than cause loss.253 Whilst the Court recognised the IR was most at risk, they were not yet a preferred creditor (GST must be payable), Cooper believed GST was resolvable and it was unclear the IR’s net position was worse-off.254 The Court of Appeal
242 At [26].
243 Cooper v Debut Homes Ltd (in liq) [2019] NZCA 39 at [47] and [51].
244 Debut Homes Ltd (in liq) v Cooper [2018] NZHC 453 at [1]- [4] and [32]. Sections 131 and 136 are addressed
in chapter 6.
245 Debut Homes Ltd (in liq) v Cooper, above n 244, at [53]-[56].
246 At [58].
247 At [63].
248 Howes, Revill and Clark, above n 208, at [CA135.04]. For example, the approach to s 131 was too objective Debut Homes Ltd (in liq) v Cooper, above n 244 at [43]-[50], the creditor focus, little weight was given to mitigating factors and a very high amount awarded in compensation Cooper v Debut Homes Ltd (in liq), above n 243, at [63] and [95], and factual findings – discussed below.
249 Wolters Kluwer “What’s New, March 2020” (case updates, March 2020); Sean Gamble Construction’s Insolvency Predicament: Cooper, Mainzeal and Reckless Trading (Hesketh Henry) at 1; and Cooper v Debut Homes Ltd (in liq), above n 243, at [21], [22] and [33].
250 Cooper v Debut Homes Ltd (in liq), above n 243, at [21]-[22].
251 At [33].
252 At [31].
253 At [64]-[65].
254 At [38] and [61]-[63].
agreed with the High Court that s 138 was not available because there were no “reports, statements...financial data and other information”.255 Given its’ findings on liability the Court did not comprehensively address s 301.256 The Court of Appeal’s judgment clarified s 135, emphasised the section must be interpreted in the light of the long title and acknowledged the place of business judgement and pragmatism.257
An important distinction between the High Court and Court of Appeal was their focus. The Court of Appeal focused on the company and body of creditors. Whereas the High Court focused on risk from the IR’s perspective, excluding consideration of benefits.258 The Courts also emphasised different facts. Hinton J painted Cooper in a negative light as opposed to the Court of Appeal’s favourable interpretation.259 Nor did the High Court share the Court of Appeal’s affinity of commercial reality.260
The case then reached the Supreme Court who held Cooper breached s 135.261 This was the Court’s first judgment on s 135, “it sent shockwaves through the director community”.262 The Court first analysed the CA’s scheme.263 They emphasised the importance of solvency, following statutory insolvency priorities and using formal mechanisms in the vicinity of insolvency – particularly because they take decision-making away from director’s and involve creditors.264 Informal mechanisms, must align with formal mechanisms.265 The judgment then considered directors’ duties. The pattern of not undertaking a close textual analysis continued – but a different gloss was applied.266 The Supreme Court’s key finding on s 135 was if a company reaches the point trading will result in a shortfall and the company is not salvageable, then trading breaches s 135.267 Risk and reward cannot be balanced and creditors cannot be compartmentalised.268 It is also not an answer to s 135 that an action was a sensible business decision. The Supreme Court stated creditors must be consulted and
255 At [77].
256 At [94].
257 At [33]; and McRae, above n 225, at 349; and Gamble, above n 249, at 1 and 4-5.
258 At [63]; and Arthur and Lethbridge, above n 183, at 4.
259 At [40], [41], [47]-[49], [56], [60] and [82]
260 At [33], [57], [58], [61] and [65].
261 Debut Homes Limited (in liquidation) v Cooper, above n 2, at [185]-[187]. 262 Litigation Forecast 2021 (MinterEllisonRuddWatts, February 2021) at 4. 263 Debut Homes Limited (in liquidation) v Cooper, above n 2, at [27].
264 At [32]-[35], [42]-[49], [73], [76], [176] and [178]-[181].
265 At [47]-[48] and [180].
266 Example of the lack of close textual analysis at [70].
267 At [174], [176] and [181].
268 At [32], [72] and [174]
directors must investigate formal options or liquidate.269 The Court did not consider s 135 controversies arose for unsalvageable companies.270 This approach meant Cooper traded recklessly. He should have consulted the IR, transacted in line with statutory priorities explored other options (namely formal mechanisms) and liquidated when his strategy failed.271 Cooper could not rely on s 138 because the accountant’s advice was generalised.272
The Court described relief under s 301(1)(b)(i) as restitutionary, and compensatory under s 301(1)(b)(ii). 273 The Court confirmed the orthodox net deterioration approach to s 135, but, left open an alternative starting point where multiple duties are breached. Multiple breaches requires tailored redress under s 301. The Court considered a restitutionary measure responded to breaching ss 131, 135 and 136.274 The starting point was November 2012 when Cooper knew the company was insolvent. The appropriate comparison was if Debut had been liquidated. If Debut was liquidated, the liquidator would have been liable to pay GST on selling the properties.275 Deductions were made for Cooper working without pay and believing his actions were in some creditor’s interests. The amount added for GST interest in penalties was confirmed. This resulted in the Supreme Court affirming the High Court’s order.276
2 Considerable Criticism of the Supreme Court’s Decision277
Whilst the imposition of liability was unsurprising due to finding the company was unsalvageable with an intentional shortfall,278 the statements of law are concerning.279 The reasoning is draconian, detached from commercial reality, does not support a rescue culture
269 At [72]-[76] and [180].
270 At [69].
271 At [73]-[77] and [180].
272 At [126]-[127].
273 At [156].
274 At [162], [164] and [167].
275 At [168]-[170].
276 At [171]-[173].
277 There are other criticisms but not all can be discussed in the constraints of this dissertation. For more criticisms of the Supreme Court’s approach see Arthur and Lethbridge, above n 183; Watts, above n 239; Peter Watts “Directors’ Duties after Debut Homes – A Return to the Scene” (2021) 6 CSLB 55; and McRae, above n 235.
278 As abovementioned, this was a typical category of liability under the pragmatic approach.
279 Watts, above n 239 at 1; and Watts, above n 277, at 55-56.
and increases uncertainty for situations between clear un-salvageability and salvageability. It may “encourage a new batch of life-destroying litigation”.280
Firstly, the Court strayed from past decisions in the way it interpreted s 135. The Courts’ role is to interpret broad wording in general provisions in light of the scheme and purpose of the relevant Act.281 The Supreme Court did not consider the CA’s dual-purpose in the long tile, nor the rationale of s 135.282 This failure resulted in a stringent approach that ignores business sense.283 In light of the CA’s purpose, it is imperative to balance risk and business judgement with protecting stakeholders.284 The Court of Appeal285 past leading decisions286 and subsequent cases287 which consider the long title and s 135’s rationale are more pragmatic, showing the impact of the missed step.288
The decision that every creditor must be treated equally and better off from trade, rather than considering creditors as a whole (like the Court of Appeal) has been criticised. This creditor driven decision making is impractical and has no place in modern company law – this has been accepted across the commonwealth.289 The CA and case law has long recognised s 135 is a duty to the company, not creditors.290 The focus should be on the company. If an entity approach is taken, a shortfall or one creditor being worse off is acceptable if actions benefit the company’s success and sustainability. Nor do the formal mechanisms mandate equal treatment. Parts 14, 15, and 15A only apply once a company is wound up or enters the arrangements.291
280 Watts, above n 239 at 3; Arthur and Lethbridge, above n 183, at 18-19; and Paul Dalkie “Insolvent Trading and Directors’ Duties” (2021) NZLJ 64 at 67.
281 Interpretation Act 1999, s 5; and Susan Glazebrook, judge of the Supreme Court of New Zealand “ Statutory interpretation, tax avoidance and the Supreme Court: reconciling the specific and the general” (paper presented to the New Zealand Institute of Chartered Accountants Tax Conference, Auckland, 2013) at 53.
282 See chapter one and chapter two.
283 Arthur and Lethbridge, above n 183, at 15-16.
284 Companies Act, long title.
285 Cooper v Debut Homes Ltd (in liq), above n 243, at [33].
286 Some examples referred to above Grant v Johnston, above n 209; Mountfort v Tasman Pacific Airlines of NZ Ltd, above n 256; Delegat v Norman, above n 225; Mason v Lewis, above n 4; and Re South Pacific Shipping Ltd (in liq), above n 136; and Goatlands ltd (in liq) v Borrell, above n 159.
287 Banks v Farmer & Others [2021] NZHC 1922; and Watts & Hughes Construction Ltd v Biala [2020] NZHC 3041.
288 McRae, above n 235, at 32.
289 Watts, above n 239, at 2.
290 Companies Act, s 169(3); Mason v Lewis, above n 4, at [51]; Law Commission, above n 9, at [192]-[195] and [284]-[286].
291 Dalkie, above n 280, at 68.
It also goes too far to say directors are not the appropriate decision-makers in the vicinity of insolvency. The policy is to encourage directors to make good decisions, not remove directors.292 There would be no need for duties if directors were not meant to be making decisions.
The Court’s approach is worryingly similar to a capital maintenance type rule by requiring companies maintain solvency or enter formal mechanisms.293 This means directors essentially guarantee solvency.294 This departs from case law which consistently acknowledged companies are not required to immediately cease trading, as insolvent trading is not itself bad and directors will not immediately know the prospects of salvage.295 The provision’s purpose is to warn directors to trade carefully, not mandate solvency or liquidation on insolvency.296 The important context of the provision’s title “Reckless Trading” cannot be forgotten.297 Whilst there is no doubt the solvency test is critical it is not absolute.298 This is because mandating solvency impinges on business activity and separate legal identity.299 Nor does solvency work in the binary manner the Court believes, there is a large turbid zone between solvency and insolvency. It is difficult to make decisions in this zone.300 Nor does the CA support this strict approach. Section 135 was intentionally separated from the insolvency regime (indicating it mandates care not formal mechanisms)301 and if the legislature wanted the provision to mean companies must enter formal mechanisms upon insolvency, they would have said this, like other jurisdictions.302 The Supreme Court’s approach is prescriptive and does not align with the CA nor support the rescue culture the CA tries to achieve.
292 See discussion in chapter two.
293 Dalkie, above n 280, at 67.
294 Arthur and Lethbridge, above n 183, at 20.
295 Dalkie, above n 280, at 65; Watts, above n 239, at 2; Re South Pacific Shipping Ltd (in liq), above n 136, at [125]; and even the stricter Fatupaito v Bates, above n 208, at [67] and [70] did not mandate immediate liquidation.
296 See discussion in chapter three.
297 Davies, above n 157, at 334.
298 See chapter one discussion; Watson and Taylor, above n 10, at 956; and Dalkie, above n 280, at 65
299 Dalkie, above n 280, at 68
300 Dalkie, above n 280, at 64-65; Madsen-Reis v Cooper [2019] NZSC Trans 23 at 37.
301 Law Commission, above n 9, at [516]; and Companies Bill 1900 (50-1) (Select Committee Report), above n 154, at 6.
302 For more discussion on jurisdictions with insolvent trading duties which compel initiation of formal proceedings see Davies, above n 157, at 314; Keay, above n 100, at 2-3; Harris, above n 14, at 11-12; and Couwenberg and Lubben, above n 101, at 63-64 and 75.
Furthermore, requiring formal mechanisms to avoid personal liability is unwise as they are not always the best solution. Formal mechanisms are expensive, reduce employee morale and cause reputational harm leading to loss of value to a going concern business.303 They are also often unsuccessful, for example, 83% of companies who used voluntary administration between 2014-2019 were deregistered.304 Whereas informal workouts are cheaper, flexible and limit publicity. However, informality means arrangements lack the legal status of formal arrangements, may disadvantage non-parties and director’s actions are not investigated.305 Watts notes this aspect of the judgment especially shows the Court introducing their moral standards.306 This is because entering formal mechanisms isn’t mandated in legislation, but the Court thinks it is desirable practice.
The wrong the Court focused on was informal liquidations that ignore statutory priorities for director’s personal interests.307 The Court was influenced by the IR’s statutory priority on liquidation.308 The policy behind the point makes sense – a director should not be able to defeat priorities by trading a company it knows is unsalvageable for self-interest.309 Whether s 135 is the most appropriate section to capture this behaviour is questionable. The Court targeting this activity rather than approach it under an existing ‘category’310 (as it could have come under them) may have been inspired by English law.311 One of the categories under s 172 in the United Kingdom is informal liquidations. However, s 172 is a fiduciary duty analogous to New Zealand’s s 131. Section 172 is also subjective and on insolvency the duty shifts to creditors.312 The more comparable provision to s 135 is s 214 of the Insolvency Act which provides no solution for informal liquidations.313 Section 135 is not a fiduciary duty, is
303 Arthur and Lethbridge, above n 183, at 10 and 20; Ellice, above n 26, at 29, 40-58; Watts, above n 239, at 2; and Finch, above n 26, at 251-252.
304 Ellice, above n 26, at 42; and Farrar and Hanrahan, above n 41, at 530.
305 At 530; and Finch, above n 26, at 251-252; and Taylor and Slevin, above n 25, at 10.
306 Watts, above n 239, at 2.
307 Arthur and Lethbridge, above n 183, at 7; Watts, above n 277, at 56 and 58; and Debut Homes Limited (in liquidation) v Cooper, above n 2, at [49].
308 Debut Homes Limited (in liquidation) v Cooper, above n 2, at [118]; and Dalkie, above n 280, at 64-65.
309 Keay, above n 26, at 300-301. There is disagreement on this point, for a contrasting view see Dalkie, above n 280, at 64-65.
310 Outlined at the start of the chapter.
311 The Supreme Court makes two references to English law suggesting this is possible. Debut Homes Limited (in liquidation) v Cooper, above n 2, at [112] and [166]. The reference in [166] to ‘net deficiency’ is the English term – ‘net deterioration’ is the New Zealand term - Arthur and Lethbridge, above n 183, at 7; and Madsen-Reis v Cooper, above n 300, at 42-44.
312 Companies Act (UK), s 172; Keay, above n 26 at 300-301; and Van Zwieten, above n 104.
313 Insolvency Act 1986 (UK), s 214; Farrar and Tennent, above n 21, at 246-247; and Van Zwieten, above n 7, at 9.
objective, is owed to the company and departed from English influence - so care must be taken when referring to English law. The activity is more appropriately captured under s 131 or the voidable preference regime made for this purpose.314 It is inappropriate to find liability for an informal liquidation outside the voidable preference period as this gives creditors rights the legislature did not intend.315
It is important to analyse the restitutionary aspect of the remedy even though it focused on s 136, as it may apply to s 135 where there are multiple breaches. The Court interpreted “repay” in s 301(1)(b)(i) as implying directors can be ordered to return money; and “restore” suggests returning the company to the position it would have been absent the breach, this includes company debt that should not have been incurred.316 Watts instead sensibly considers that “repay” refers to returning money, and “restore” refers to returning property. Furthermore, s 301(1)(b)(i) does not capture the wrong in ss 135 or 136, only the reference to “negligence, default, or breach of duty” does and this correlates to s 301(1)(b)(ii).
Restitutionary remedies reverse the precise inappropriate transfer of property received by someone and consider counter-receipts.317 The Supreme Court erroneously focused on loss to the creditors rather than the company as s 301 requires, they did not state the benefit Cooper obtained nor base repayment on this, did not give weight to counter-receipts nor to the activities being ordinary business.318 From an entity perspective the transactions did not worsen or increase survival but did decrease debt owed – affecting its financial position, arguably improving the net position.319
The law remains in an uncertain state. The Supreme Court largely did not discuss past case law leaving its’ place unclear.320 Furthermore, the Supreme Court does not appear to have found its draconian approach/gloss in the literal wording as there was minimal close textual analysis. Leaving the exact words of the provision still in question. For example, the Court failed to fully address the phrase ‘serious loss”.321 $300,000 is not a ‘serious loss’ to a
314 Campbell, Watts, Francis and others, above n 18, at [63.2].
315 Companies Act, s 292(4C); Watts, above n 277, at 60-61; and Heath and Whale, above n 22, at [24.1].
316 Companies Act, s 301; and Debut Homes Limited (in liquidation) v Cooper, above n 2, at [157].
317 Watts, above n 239, at 3; and Arthur and Lethbridge, above n 183, at 11-13.
318 Companies Act, ss 301 and 169(3); Watts, above n 277, at 56-57; Arthur and Lethbridge, above n 183, at 11-
14; and Watts, above n 239, at 3.
319 Cooper v Debut Homes Ltd (in liq), above n 243, at [61]; and Arthur and Lethbridge, above n 183, at 13. 320 Watts & Hughes Construction Ltd v Biala, above n 287, at [22] and [26]; and Debut Homes Limited (in liquidation) v Cooper, above n 2, at [70] and fn 83.
321 Debut Homes Limited (in liquidation) v Cooper, above n 2, at [70].
sophisticated creditor like the IR.322 The phrase was important to consider as a key part of s 135’s application, and for potentially skewing the provision towards vulnerable creditors and balancing creditors’ and directors’ interests.
The negative implications of the decision will depend on how widely it is applied.323 The Supreme Court noted in multiple instances they were only dealing with unsalvageable businesses.324 This may confine the ratio to unsalvageable companies. 325 This ratio would mean wider statements in the judgment are obiter.326 If these statements are applied widely, Debut will significantly impact commercial transactions, especially for companies who closely walk the line of solvency.327 Directors will personally guarantee the company debts, are not able to take actions which benefit the entire company unless every creditor benefits, must shift their focus in financial difficulty from sustaining the company to every creditor, cannot take normal business risks which balance risk and reward, upon insolvency formal actions should be taken and when transacting directors must uphold insolvent priorities (even outside the voidable preference period). As a result, the purpose of incorporation – separate personality for risk-taking – is lost.328 This judgment does not balance legitimate business risks and protecting stakeholders.329 The chapter one principles of the CA have not been given effect. The case shows s 135 needs amendment.
B Mainzeal
Mainzeal has run alongside Debut.330 Mainzeal, was a construction company. For eight to ten years before liquidation, Mainzeal relied on informal support from Richina, majority shareholder and previous parent company.331 By 2011, advice showed Mainzeal was balance sheet insolvent and reliance on group support was problematic and unreasonable.
322 Watts, above n 239, at 2; for further comment on the finding $300,000 was a ‘serious loss’ see Heath and Whale, above n 22, at [32.3.3].
323 Arthur and Lethbridge, above n 183, at 16; and Watts, above n 277, at 55-56.
324 Debut Homes Limited (in liquidation) v Cooper, above n 2, at [69] and fns 198, 208 and 83
325 Watts, above n 277, at 55.
326 At 55-56.
327 Grantham and Rickett, above n 33, at 592; Watts, above n 42; Watts, above n 239, at 3; Dalkie, above n 280,
at 64 and 68; and Deane, above n 117, at 2.
328 Dalkie, above n 280, at 67.
329 Watts, above n 239, at 3.
330 The Supreme Court has granted leave to appeal. Yan v Mainzeal Property and Construction Limited (in liq)
[2021] NZSC 109 at [1].
331 Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [1], [73], [84] [88]
[107][108] [127] [150] [361] and [443] [445].
Nevertheless, the directors continued trading normally.332 In 2012 Mainzeal experienced cash flow difficulties. Advice in December 2012 identified significant concerns.333 In 2013 Mainzeal went into liquidation owing $110million to unsecured creditors.334 The liquidator brought a claim under s 301 for breach of ss 135 and 136.335
Both courts found the directors breached s 135 as Mainzeal had been trading balance sheet insolvent for a protracted period without improvement, had long-standing poor performance and the directors were inactive. By early 2011 there was no reason to think solvency could be restored.336 Again, imposition of liability was unsurprising based on these factual findings (likely breaching the pragmatic test too), it is some of the statements of law which are concerning.337
The High Court took a novel approach and was critical of early case law.338 Notably, Cooke J said s 135 is not limited to considering either liquidation or continued trade and can encompass other modes of business.339 The alternative strategies Cooke J identified were recapitalising, formalising informal funding arrangements and the directors resigning.340 He also took a strict approach to solvency – accepting ss 135 and 136 replaced the capital maintenance rule, meaning directors were responsible for adequately capitalising the company.341 The approach applied to the facts meant Mainzeal breached s 135.342 Cooke J set aside the traditional net deterioration compensation measure on the basis that if the directors had threatened to resign a better result would have eventuated.343 His approach centred on culpability rather than causation.344 The starting point was the full debt, but the culpability of
332 [133]-[138] [145][189] [432][443] [445]-[448]
333 At [475]-[476] [151]-[173].
334 At [1]
335 Mainzeal Property and Construction Ltd (in liq) v Yan [2019] NZHC 255 at [3].
336 At 187; and Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [445]-[448] and [452].
337 At [446]-[447]; Re South Pacific Shipping Ltd (in liq), above n 136, at [125]; and even the stricter Fatupaito v Bates, above n 208, at [67] and [70] did not mandate immediate liquidation.
338 For example Cooke J was sceptical of the distinction between legitimate and illegitimate risk-taking and the capital and revenue account distinction between ss 135 and 136 (discussed in chapter five); Mainzeal Property and Construction Ltd (in liq) v Yan, above n 335, at [163]-[164] and [300]-[301]; and Richard Gordon “Directors' duties and the case for vulnerable trading?” (17 July 2019) MinterEllisonRuddWatts
339 Mainzeal Property and Construction Ltd (in liq) v Yan, above n 335, at [168].
340 At [232]-[233], [293], [417]-[419, [423] [417].
341 At [544] and [169]-[174].
342 At [187].
343 At [416]-[419].
344 Conder and Fraundorfer, above n 226, at 152 and 179.
the directors justified reduction, meaning $36,000,000 was appropriate.345 Cooke J justified the decision by stating Mainzeal’s circumstances were exceptional.346 This is not the case. Commercially experienced commentators noted intergroup transactions, shareholder support, and trading during difficult times are commonplace. The High Court’s approach adds unnecessary complexity into the law as it could have been decided under traditional measures.347
The Court of Appeal’s decision in Mainzeal restores some orthodoxy and clarity following Cooke J’s judgment and the Supreme Court’s Debut decision.348 The Court of Appeal rejected the High Court’s stance (and the Supreme Court’s strict approach to an extent) on solvency, stating “directors do not have a duty to capitalise a company adequately”.349 The Court analysed s 135 in light of the text and dual-purpose.350 The Court of Appeal also endorsed the orthodox pragmatic approach from Mason.351 However, with some differences that stem from affirming aspects of the Supreme Court’s Debut decision. Namely, the Court did not accept there was room for a business judgement approach in the objective provision (despite the long title),352 affirmed the requirement to consider all alternatives,353 ensure actions benefit all creditors,354 and that recourse to formal mechanisms is essential.355 To avoid liability directors should not continue business as usual, be cautious, seek advice, liquidate if returning to solvency seems unlikely after considering alternatives and attempt to address issues.356 The guidance helps directors navigate the law.357 Mainzeal’s directors did the one thing not open to them – continue normally.358 The alternative courses available to the directors were pressing for repayment of the debts owed to Mainzeal, seeking written assurances of support,
345 Mainzeal Property and Construction Ltd (in liq) v Yan, above n 335, at [430]-[436] and [445]-[460].
346 At [284]–[285].
347 McRae, above n 225, at 349; and Gamble, above n 249, at 7-8.
348 Matt Kersey, Jeremy Upson, Nathaniel Walker and Gordon Lamb “Mainzeal Judgement: Court of Appeal Finds Directors Liable with Quantum Still to be Clarified” (6 April 2021) Russell McVeagh
349 Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [256]; and see chapter one for discussion on solvency and capital maintenance in the Companies Act 1993.
350 At [195].
351 At [253], [266]-[268] and [441]; and Heath and Whale, above n 22, at [32.3.2].
352 At [262]
353 At [442] and [446]-[452].
354 At [264].
355 At [270].
356 At [445]-[452].
357 Sean Gollin “Court of Appeal Confirms Liability of Mainzeal Directors” (31 March 2021) MinterEllisonRuddWatts <www.minterellison.co.nz>.
358 Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [446] and [452].
reviewing the appropriateness of trading, ring-fencing new projects, threatening to wind down the business or resign.359 Whilst this is less extreme than the High Court’s judgment and Supreme Court in Debut, the Court of Appeal still imposed their own judgement with hindsight, not fully appreciating the directors’ predicament – like being hampered by the wider group.360
The Court of Appeal overturned the High Court’s entire deficiency approach as the breaches did not cause the company to become insolvent.361 They also rejected the new debt approach for s 135 which protects “new creditors” who extended credit after the company should have ceased.362 This approach was formulated by Moss on the basis “it is a disgrace...a director can get away with wrongful trading as long as...net deficiency...does not increase”. Such change was pertinent for the United Kingdom as there was no gap filler for these situations.363 However, New Zealand has other coverage.364 Furthermore, the new damages approach was “necessary to fulfil the intention of the statute, to create justice to creditors”.365 This shows the approach is inappropriate for New Zealand’s focus on the company.366 Whilst the net deterioration approach may sometimes mean no compensation is awarded, this occurs where there has been no loss to the company, making it the appropriate measure under an entity regime. So, the Court decided the net deterioration approach was appropriate for s 135.
However, no compensation was recoverable because there was no net deterioration in Mainzeal’s position.367 the Court of Appeal was divided over the extent of their
discretion under s 301. Kós P and Miller J favoured the current broad discretion. Whereas Goddard J, felt broad discretion was inappropriate given s 301 is only one way of bringing proceedings against directors. Liquidators could avoid the court’s s 301 discretion by bringing an ordinary action where judges have less discretion.368 However, the
court’s discretion is important as it can ameliorate the harsh duty.369 The Court did not have
359 At [447]-[450].
360 Gollin, above n 357.
361 Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [484]-[491] and [503]- [509].
362 At [525]-[531].
363 Arthur, above n 138, at 53-54; Gabriel Moss “No Compensation for Wrongful Trading – Where Did it All Go Wrong?” (2017) 30 Insolv.Int. 49, 50-51 at 56.
364 Mainzeal Property and Construction Ltd (in liq) v Yan, above n 335, at [385]; and discussed in chapter five.
365 Moss, above n 363, at 56.
366 Mainzeal Property and Construction Ltd (in liq) v Yan, above n 335, at [386].
367 Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [513]-[518].
368 At [303]-[307].
369 Heath and Whale, above n 22, at [32.3.6].
to rule on the point, because the issue of damages was sent back to the High Court. Creditors claiming (instead of a liquidator) under s 301(1)(c) was also left open for future determination.370 So, compensation remains uncertain.371
Importantly the Court of Appeal called for these provisions to be reviewed to ensure the laws is coherent and workable.372
Despite the Court of Appeal improving upon the High Court’s decision, they share common shortfalls. Firstly, condemning intergroup transactions and shareholder support mechanisms without realising they are commonplace in commerce has wide implications on business activity. 373 Especially because the Court did not provide realistic alternatives for directors.374 For example, getting a legally enforceable guarantee is unlikely because it defeats the purpose of separate legal identity limiting liability. Furthermore, the alternatives proposed largely lay outside the directors control and may be harmful.375 For example, supporting resignation is unwise as directors know companies the best and their absence leaves the company looking for someone to make critical decisions, creating disarray.376 This shows the judiciary’s deficient commercial knowledge and struggle to avoid hindsight bias.377 Hypothetical alternatives expose directors to wider liability,378 inviting “courts into the board- room to substitute their own judgment for...duly appointed directors...Such an approach creates...substantial risks for directors”.379
370 Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [307] and [308]-[309].
371 “Court of Appeal Highlights Need to Amend the Companies Act in Latest Mainzeal Decision” (7 April 2021) Duncan Cotterill <www.duncancotterill.com>.
372 Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [12].
373 McRae, above n 225, at 349.
374 Sam Holden, Janko Marcetic and others Litigation & Dispute Resolution – Trends and Insights (Chapman Tripp, August 2020) at 5.
375 “The Mainzeal Collapse and What Could’ve Been Done Differently” (1 March 2019) Duncan Cotterill
<www.duncancotterill.com>; and Conder and Fraundorfer, above n 226, at 152.
376 Grantham and Rickett, above n 33, at 589; and Cooper v Debut Homes Ltd (in liq), above n 243, at [58].
377 Gamble, above n 249, at 8.
378 Debut Homes Limited (in liquidation) v Cooper, above n 2, at [73] and [76]; Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [442] and [446]-[452]; and Mainzeal Property and Construction Ltd (in liq) v Yan, above n 335, at [168].
379 Conder and Fraundorfer, above n 226, at 148.
C Debut’s Frosty Reception in the High Court
Two recent decisions show the High Court distinguish the Supreme Court’s Debut
decision.380
In Watts & Hughes Construction Ltd v Biala the High Court noted the Supreme Court in Cooper did not engage with whether it is legitimate for companies experiencing temporary financial difficulties to continue trading nor relevant case law, meaning the cases under the orthodox pragmatic approach remained open. So, the Court reverted to the pragmatic Mason approach.381 The Court also reiterated the difference between negligence (what reasonable directors would have done or foreseen) and punishable reckless trading. Here, the facts involved considering the risks a start-up company faced.382 The directors undertook a sober assessment and made a calculated risk to start-up the business and undertake related activity based on their experience. There was a reasonable expectation the business would trade profitably.383 Their decisions did not depart “markedly from orthodox business practice and involved...extensive...unusual risk to...creditors” to be reckless.384 That does not change in hindsight just because trading expectations were not met.385 Notably, in contrast to Debut, even if s 135 had been breached, compensation would not have been ordered because the
$39,000 loss to Watts and Hughes, a large construction company, was not ‘serious’.386 The Court’s appreciation of commercial reality is clear in the very pragmatic judgment which does not follow Debut.
Secondly Banks v Farmer.387 The Court emphasised the policy rationale in the long title requires balancing protecting stakeholders, including the entity itself and encouraging legitimate business risks/judgement.388 This gives proper weight to the CA’s dual-purpose and entity focus. Like Watts and Hughes v Biala, Moore J relied on orthodox authorities, as
380 There are other recent decisions. They are standard cases and not of particular note. Other recent cases include Parkinson v O’Brien on Behalf of General Dynamics Corporation Ltd [2021] NZCA 309; O’Brien v Parkinson & Others [2021] NZHC 1193; New Zealand Labour Enterprises Limited & Anor v Sembhi & Anor [2021] NZHC 986; Kelstworural Ltd (in liq) v Mounsey-Ross [2021] NZHC 1632; and Independent Carpets Ltd (in liq) v Carpet Call 2000 NZ Ltd [2021] NZHC 1750.
381 Watts & Hughes Construction Ltd v Biala, above n 287, at [22]-[27].
382 At [28]
383 At [33]-[62].
384 At [60]; and compare to Debut Homes Limited (in liquidation) v Cooper, above n 2, at [72].
385 At [28] and [43].
386 At [70].
387 Banks v Farmer & Others, above n 287.
388 At [364]-[368].
well as the Court of Appeal in Mainzeal and (boldly) Debut.389 Moore J emphasised directors do not become liable simply by trading after insolvency, a court is to consider upside to the business (to respect directors wide discretion in matters of business judgement) and that it is risk and loss to the company as a whole.390 Moore J reemphasised courts must avoid hindsight judgements as they do not fully comprehend difficult commercial choices. The directors breached s 135 by continuing trade after a deal essential to the company’s solvency failed. But no compensation was awarded as the plaintiff was not at risk of further loss.391
These judgments show clear preference for the pragmatic approach. They balance the CA’s dual-purpose and should be the approach consistently applied.
D Overarching Criticisms of the Modern Judgments and Judiciary
Section 135 remains uncertain after almost 30 years in force. The recent strict decisions make continued trading and directorships daunting due to potentially wide personal liability.392 The exclusion of considering risk commensurate with reward, excluding commercial reality/orthodoxy and imposition of hindsight on alternatives creates a harsh environment leading to chapter two inefficiency concerns.393
Commentators’ concerns (in chapter three) eventuated. The broad objective wording allows commercially inexperienced judges to take an approach/gloss that enables them to ‘stamp’ their own judgement on experienced businesspeople with minimal consideration of the difficulties directors face (directors will not truly know a company is salvageable until future events transpire). 394 Judges allocate risk in the way they think fair rather than based on underlying principles.395 Commentators suggest directors are perceived as villains and that judges traditionally sympathise with creditors.396 This approach is evidenced through the increasing breadth and burden of directors' duties, which are actually owed to the company,
389 At [369]-[387].
390 At [385]-[387]; in line with Cooper v Debut Homes Ltd (in liq), above n 243, at [31]-[33].
391 At [375] [386] and [451]-[455].
392 Conder and Fraundorfer, above n 226, at 178-179.
393 Bos and Wiseman, above n 17, at 266-267.
394 Grantham and Rickett, above n 33, at 56-57; Farrar and Hanrahan, above n 41, at 574; Bos and Wiseman, above n 17, at 264 and 267.
395 Farrar and Hanrahan, above n 41, at 567 and 571-572.
396 Bos and Wiseman, above n 17, at 266 and 268; Keay, above n 16, at 439-441; and Keay, Loughrey and others, above n 201, at 644-645.
in the interests of protecting creditors.397 Unprincipled decisions based on intuition leave directors uncertain as to how their conduct will be judged398 and creditors unsure on when to bring a claim.399 For example, in Debut all three courts came to different conclusions based on ‘cherry picking’ facts to suit their outcome. In other jurisdictions and New Zealand’s past, directors found solace in the business judgment rule.400 The Law Commission stated courts were not to second-guess directors who were permitted wide discretion in business matters.401 Furthermore, the deregulatory North American influence on the CA requires understanding law and economics.402 But, the business judgment rule and director discretion in common law have diminished.403 This also impinges upon separate legal identity.404 Thus, it is unsurprising the success of s 135 cases is high.405
These criticisms are illustrated by the harsh judgment of the High Court in Mainzeal, and Supreme Court and High Court in Debut. Their stringent approaches to s 135 fail to give weight to both aspects of the long title. On the other hand, the pragmatic decisions of the Court of Appeal in Debut and Banks v Farmer show appreciation of commercial reality and balancing between protection and efficiency.
Commentators and directors believe the harsh approach to reckless trading duties will negatively impact directorships.406 47% of directors in the Institute of Director’s 2020 Survey felt increased personal liability made them more cautious in business decision-making.407 Risk aversion means boards miss valuable opportunities for the company. Targeting directors personally adds to an already large legal onus, compliance activities increased for 70% of
397 This view has been long established per Brennan, above n 94, at 1-2; and Lo, above n 116, at 233.
398 Bos and Wiseman, above n 17, at 267; and Deane, above n 117, at 4.
399 Fitzsimons, above n 22, at 285-287; and Farrar and Hanrahan, above n 41, at 571-572.
400 Grantham and Rickett, above n 33, at 568; Watts, above n 42, at 129 and 240-242; and Law Commission, above n 8, at [212].
401 Law Commission, above n 9, at [138]-[144].
402 Fitzsimons, above n 22, at 284-285, 287 and 292-293.
403 Sealy, above n 50, at 80; and Andrew Keay, Joan Loughrey and others “Business judgment and director accountability: a study of case-law over time” (2020) 20 J. Corp. Law Stud. 359 at 359 and 361.
404 Farrar and Hanrahan, above n 41, at 567.
405 Taylor, above n 1, at 186.
406 This refers to the inefficiency concerns considered in chapter two. For further discussion on this point, including empirical evidence, see Farrar and Hanrahan, above n 41, at 590; Farrar and Tennent, above n 21, at 246 ; and Keay, Loughrey and others, above n 403.
407 Institute of Directors New Zealand and ASB Director Sentiment Survey 2020 (Institute of Directors, December 2020) at 4.
directors. This takes time away from performance and strategy.408 In 2019 and 2020, 40% of directors said the scope of director responsibilities is more likely to deter them from governance roles. It is fundamental to good governance and New Zealand’s prosperity that skilled individuals are directors.409
Part of the uncertainty comes from the courts taking different theoretical approaches to the corporate objective.410 A judge’s personal preference affects the interpretation and outcome of a case. For example, Banks v Farmer and the Court of Appeal in Debut took an ET approach. Focusing on the company resulted in commercial and balanced decisions. In comparison, the Court of Appeal in Mainzeal took a SP shifting approach411 and the Supreme Court412 and High Court413 in Debut and High Court in Mainzeal414 took a creditor primacy approach.
These approaches lead to overprotection of creditors at the cost of directors because a creditor focus holds creditors’ interests are paramount.415 The focus on creditors results in erroneously focusing on insolvency, requiring excessive caution and viewing the company’s funds as creditor property (“using creditors’ money” to trade).416 The focus should be on the company as an entity with its own property. The corporation’s interests are paramount and are not to be confused with creditors. Section 135 is specifically owed to the company, the remedy goes into the company’s fund and loss is calculated by reference to the company.417 This has also
408 Selwyn Eathorne Submission on the Law Commission’s Issues Paper on Class Actions and Litigation Funding (Institute of Directors New Zealand, March 2021) at 3.
409 At 8.
410 No approach has been firmly adopted, Debut Homes Limited (in liquidation) v Cooper, above n 2, at [28]- [31].
411 The Court’s commentary/discussion on the Companies Act shows a SP understanding, Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [205], [214], [218], [230], [231] and [232]. The reference to ‘shareholder funds’ and general SP suggest the Court would see the company using ‘creditor funds’ when ‘shareholder funds’ run out, Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [140] and [233].
412 The focus on creditors can be seen in the emphasis on the insolvency statutory priorities, the formal mechanisms, liquidation, consulting creditors and not allowing risk and reward being balanced, any shortfall/compartmentalising of creditors nor consideration of orthodox business practice. Debut Homes Limited (in liquidation) v Cooper, above n 2, at [32]-[35], [42]-[49], [72]-[76], [176] and [174]-[181].
413 Some examples of the creditor centric approach in the High Court are, the approach to s 131 was too objective Debut Homes Ltd (in liq) v Cooper, above n 244, at [43]-[50], little weight was given to mitigating factors and a very high amount awarded in compensation Cooper v Debut Homes Ltd (in liq), above n 243, at
[63] and [95], different factual findings from the Court of Appeal Cooper v Debut Homes Ltd (in liq), above n 243, at [40], [41], [47]-[49], [56], [60] and [82] and creditor focus with little mention of the company Debut Homes Ltd (in liq) v Cooper, above n 244, at [46] [47] [50] [53].
414 The over protection of creditors illustrates this point. An example is the terminology of ‘creditor money/funds’. Mainzeal Property and Construction Ltd (in liq) v Yan, above n 335 at, [203], [280], [164] and [166].
415 Keay, above n 26, at 306.
416 Watts, above n 277, at [62]; Conder and Fraundorfer, above n 226, at 151; and Buckley, above n 12, at 1389.
417 Watts, above n 277, at [56]-[57].
led to the anomaly that s 135 claims cannot be made during solvency as there is no loss to creditors – despite the legislature’s intention for application throughout the company’s life.418 The focus on creditors means ET’s broader approach and focus on maximising value and financial sustainability is lost.419 ET provides a medium between excessive risk and excessive caution, a creditor focus requires directors choose risk-averse courses which do not always benefit the company.420 Furthermore, Canadian courts where ET is prevalent and the CA originates, allow discretion and business judgement. A director should not be held back from taking actions that benefit the company merely because one creditor may not benefit, or it may impact solvency. An entity focus aligns with the CA and promotes valuable business activity.421
Another issue is some courts still look to English jurisprudence despite the clear departure from English company law.422 One of the main consequences of this has been the focus on insolvency. Section 214 of the Insolvency Act (the s 135 equivalent) only applies upon financial distress.423 The focus on insolvency also applies to the creditor regarding sub- provision in the s 172 duty.424 Throughout s 135’s history courts have focused on the point of insolvency, even though the CA does not require this or the solvency test be used, and intentionally moved away from the insolvency regime and removed the Law Commissions’ reference to solvency from the provision.425 The insolvency focus of the United Kingdom duties is one of their most problematic features because there is no clear pronouncement of the form of financial distress and it is difficult to identify the point of insolvency.426 Whilst the financial state of the company has relevance to s 135, the courts should not be distracted by technicalities.427 The solvent or insolvent view taken makes no allowance for diverse situations.428
418 Arthur, above n 138, at [54].
419 Dalkie, above n 314, at 65.
420 Keay, above n 77, at 638; and Callison, above n 56, at 435.
421 Dalkie, above n 314, at 65-66.
422 Watson and Taylor, above n 12, at 132.
423 Insolvency Act (UK), s 214 and 246ZB; and Keay, above n 135, at 4-5.
424 As discussed, their Companies Act takes a SP approach which shifts focus to creditors upon insolvency. Companies Act (UK), s 172; Keay, above n 31, at 305-306; and Sealy, above n 10, at 178-180.
425 Watson and Taylor, above n 12, at 604.
426 Andrew Keay “Another way of Skinning a Cat: Enforcing Directors’ Duties for the Benefit of Creditors” (2004) 17 Insolv.Int. 1 at 5-6.
427 Sealy, above n 10, at 178.
428 Dalkie, above n 314, at 64-65
All the uncertainty makes the law inaccessible.429 Recourse to the courts is already slow and expensive.430 Private enforcement has been low due to inadequate funding and because unsecured creditors are often only owed small amounts making legal action unviable.431 The long processes of Mainzeal and Debut illustrates these issues. Mainzeal’s creditors are still waiting for litigation to end and may face years of delay.432 The access to justice issue will be assisted by the growing class action and litigation funding sectors providing affordable mechanisms for group claimants to pursue actions.433 However, increased litigation funding has negative consequences too. It may lead to greater risk aversion in director decision- making and increase compliance burdens. This occurred in Australia, resulting in long-term negatives impacts on economic growth and employment.434
The increased risk of litigation the recent decisions expose directors to and the growing litigation funding and class action environment has contributed to New Zealand’s volatile D&O insurance market.435 Insurers have noted the expanded role and responsibilities of directors, growth in class actions and litigation funding, the notable legal developments, substantial court awards against directors, the decreasing protection provided by the business judgement rule, the uncertain and increasingly risky claims environment and increased risk of insolvency.436 The high profile Mainzeal ‘group action’ has particularly caught insurers attention.437 As a result, It has been difficult and costly to renew D&O insurance. Coverage is shrinking and lower limits are offered.438 This is concerning because the factors increasing insurance costs also increase directors’ need for insurance, adding to directors’ vulnerability.439
429 Keay, above n 63, at 615.
430 Kersey, Upson, Walker and Lamb, above n 348; and Law Commission, above n 9, at [144].
431 Taylor, above n 1, at 179-182.
432 Kersey, Upson, Walker and Lamb, above n 348.
433 Litigation Forecast 2021, above n 262, at 14; Eathorne, above n 408, at 2.
434 Eathorne, above n 408, at 4-5; and Parliamentary Joint Committee on Corporations and Financial Services Litigation Funding and the Regulation of the Class Action Industry (Senate Printing Unit, December 2020) at [5.13].
435 Litigation Forecast 2021, above n 262, at 9; and Eathorne, above n 408, at 6-7.
436 MinterEllissonRuddWatts, Marsh and Institute of Directors New Zealand Directors and Officers Insurance: Trends and Issues in Turbulent Times (Institute of Directors New Zealand, June 2019) at 3-4; and Litigation Forecast 2021, above n 262, at 11-12.
437 Litigation Forecast 2021, above n 262, at 10; Holden, Marcetic and others, above n 374, at 5; and Marsh and Institute of Directors New Zealand, above n 436, at 3.
438 Litigation Forecast 2021, above n 262, at 8-11; and Marsh and Institute of Directors New Zealand, above n 436, at 4.
439 Marsh and Institute of Directors New Zealand, above n 436, at 3; at Eathorne, above n 408, at 7
These issues with the judiciary’s commercial law decisions have from time to time lead to calls for corporate governance disputes to be taken away from the courts and transferred to specialist dispute resolution tribunals/panels of businesspeople or corporate advisors.440 An example is the Takeover’s Panel whose experienced members aim to provide “clarity, certainty, awareness and fairness for everyone involved in major share transactions”.441 However, the issues are a consequence of s 135’s drafting – its broad objective standard, the uncommercial, confused and unsatisfactory wording.442 As considered in relation to the Resource Management Act 1991, we do not want judges having such wide discretion, it is outside their role and the consequences are unsatisfactory.443 An easier solution than setting up a specialist dispute resolution framework is to amend the provision.
Conclusion
Given the extensive issues with s 135 and judiciary’s approach it is not surprising the Government shares the Court of Appeal’s view that a review of the law is warranted.444 A provision that clearly entrenches the pragmatic approach, includes a partly subjective aspect enforcing consideration of business judgement and reality is permissible, enforces movement away from a rigid insolvency focus, reemphasises the duty is owed to the company and entrenches the net deterioration calculation would capture the CA’s dual-purpose and entity focus. This will help the section capture the truly reckless conduct it was intended to protect the company from. Providing certainty and entrenching the pragmatic approach creates substantive and procedural fairness for creditors and directors. A directors’ duties purpose provision reaffirming the relevance of the long title in the application of directors’ duties would also help the courts.
440 Farrar and Hanrahan, above n 41, at 567-568.
441 At 568; and“About the Panel” Takeovers Panel Te Pae Whitimana <www.takeovers.govt.nz>.
442 Watts, above n 239, at 1; and Watson and Taylor, above n 10, at 608.
443 Sian Elias, Chief Justice of the Supreme Court of New Zealand “Righting Environmental Justice” (paper presented to the Resource Management Law Association Salmon Lecture, July 2013) at 4, 6-7 and 13; and Anderson, above n 15, at 228.
444 Holden, Marcetic and others, above n 374, at 4.
Chapter Five: Overlapping Directors Duties – Superfluous Section 135
New Zealand law provides creditors many tools for compensation and protection, including broad overlapping directors’ duties which indirectly benefit creditors.445 This gives rise to the question of whether the problematic s 135 is needed.446
I Delaware and Canada
Delaware and Canada are useful to consider as neither impose insolvent trading duties on directors.447 In 2007 the Delaware Supreme Court denied creditor rights to bring direct claims.448 The Court denied a duty to creditors because it would create uncertainty, conflict with the duty to maximise value and was unnecessary as creditors have other legal protections.449 Canadian law also does not include an insolvent trading duty. Directors have duties of loyalty and care.450 The Supreme Court of Canada held the duties were only owed to the company because the Canada Business Corporations Act states the corporation is the beneficiary, a range of statutory remedies are available to creditors and ET means the company’s interests overlap with other constituencies.451
This approach had mixed consequences. In Delaware, the lack of insolvent trading duty led to unchecked chaos.452 This has not occurred in Canada. The different outcomes can be attributed to the different underlying theories in the jurisdictions. Delaware is a SP
445 Ross, above n 24, at 37; and Harris, above n 14, at 3.
446 Due to constraints, this chapter will not consider provisions beyond directors’ duties to the company under the Companies Act. This chapter also focuses on the overlap between s 135 and ss 136, 137 and 131 as opposed to critiquing the provisions. This chapter will largely not discuss remedies.
447 Harris, above n 14, at 11; and Licht, above n 101, at 25.
448 For more see Jared Ellias and Robert Stark “Delaware Corporate Law and the ‘End of History’ in Creditor Protection” (research paper, UC Hastings, 2020) (forthcoming) at 14-23; Licht, above n 101, at 28-29; N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 100 (Del. 2007) at 103; and Quadrant Structured Prod. Co. v. Vertin, 102 A.3d 155, 176 (Del.Ch. 2014) at 176.
449 N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, above n 448, at 94 and 100-103; Ellias and Stark, above n 448, at 19-24; Grantham and Rickett, above n 33, at 591; Hargovan and Todd, above n 119, at 163-177; and Bainbridge, above n 67, at 345-348.
450 Canada Business Corporations Act 1985 (CA) s 122; Doing Business in Canada (Fasken Martineau DuMoulin LLP, 2019) 55-56; and Responsibilities of Directors in Canada (Torys LLP, 2009) at 16-18.
451 Canada Business Corporations Act (CA), s 241; Licht, above n 101, at 23 and 25-27; Peoples Department Stores Inc. (trustee of) v Wise, above n 72, at 481-482; and BCE Inc v 1976 Debentureholders, above n 72, at 71, 82 and 84; Responsibilities of Directors in Canada, above n 450, at 16-19; Vasudev and Watson, above n 37, at 115-116; Couwenberg and Lubben, above n 101, at 64-65; and Harris, above n 14, at 11-12.
452 Jared Ellias and Robert Stark “Bankruptcy Hardball” (2019) 308 Cal.L. 1 at 1-10 and 66-67.
jurisdiction. SP governance focuses excessively on shareholders, leaving little room for creditors in ‘the company’, which enabled directors to engage in tactics harmful to creditors for shareholder benefit.453 In comparison, Canada is a strong ET jurisdiction that mandates the company’s interests are furthered (prohibiting excessive risk).454 During financial difficulty creditor interests strongly shape behaviour.455 This shows general directors’ duties may be sufficient.456
II Overlapping Director’s Duties – No Gap to Fill?
There are relevant tools and statutory liabilities for insolvent trading in property, insolvency, taxation, company law and more.457 However, the other directors’ duties owed to the company alone show significant overlap with s 135.458 Section 135 claims (under s 301) are often combined with claims for breach of s 131(1), s 136 and s 137.459 Section 135 may be an unnecessary duplication of these duties.460
A Section 136
Section 136 states directors must not agree to the company incurring obligations it cannot perform. It applies throughout the company’s life and is owed to the company.461 Section 136 is closely related to s 135 as the other ‘insolvent trading duty’ (even though it does not refer
453 At 1-3, 10-12 and 15.
454 Buckley, above n 12, at 1387 and 1398; Peoples Department Stores Inc. (trustee of) v Wise, above n 72, at 4481-82; and BCE Inc v 1976 Debentureholders, above n 72, at, 82 and 84.
455 Peoples Department Stores Inc. (trustee of) v Wise, above n 72, at 482. For more discussion on this point see chapter one.
456 Vasudev and Watson, above n 37, at 116.
457 Claims for breaches of insolvent trading duties are often combined with claims of a different nature Taylor, above n 1, at 186-187. For comment on contractual options, Taylor, above n 1, at 192; recourse for the IR, Inland Revenue Department Income Tax and Goods and Services tax – Director’s liability and the COVID-19 “safe harbour” in schedule 12 to the Companies Act 1993 (Public Ruling BR PUB 20/06); Property Law Act 2007, ss 347 and 348 and pt 6 sub-pt 6; tort and Fair Trading Act 1986 actions, Watson and Noonan, above n 14; insolvent antecedent transaction provisions under the Insolvency Act 2006, Heath and Whale, above n 22, at [24]; Companies Act ss 300, 56, 289, 138A(1), 380, 298, 299, 297, 292, 293, 296, Heath and Whale, above n
22.
458 Companies Act, s 169(3); and Julie Cassidy “Wake up New Zealand: Directors’ Duties Reform Responses to the Global Financial Crisis” (2014) 20 NZBLQ 181 at 183; and Watson and Taylor, above n 10, pt 5; and Campbell, Watts, Francis and others, above n 18, at [24].
459 Taylor, above n 1, at 186.
460 Julie Cassidy “Superfluous or Superlative: The Role of Reckless/Insolvent Trading prohibitions in New Zealand, Australian and South African Directors’ Duties Regimes” (paper presented to the Corporate Law Teachers Association Annual Conference, Melbourne, February 2020) at 3 and 7.
461 Companies Act, ss 136 and 169(3); and Watson and Taylor, above n 10, at 625; Debut Homes Limited (in liquidation) v Cooper, above n 2, at [165] and fn 190.
to creditors).462 The provisions are so similar they were included under the same section in the Law Commission’s draft.463 Taking risk and incurring an obligation are similar questions.
Section 136 has three elements; the defendant is the director, an obligation was incurred, and when the obligation was incurred, the director did not honestly believe (subjective test) on reasonable grounds (objective test - considering if the director acted as a reasonable director would have) the company could perform the obligation.464 The second element has been debated. Previously, the absence of ‘causes’ or ‘allows’ like s 135 and considering the director’s belief – suggesting knowledge is relevant, was taken to indicate ‘agree’ accompanied by ‘incur’ requires a positive act of agreement to incur a specific contractual obligation, not obligations from the general running of the company (which s 135 covers).465 This aligns with the other traditional distinction between the insolvent trading duties – that s 136 deals with capital account (one off specific transactions) and s 135 deals with revenue account (the general running of business) obligations.466 Debut and Mainzeal rejected these interpretations as having no policy reason or support in the text or wider context.467 This means s 136 now applies to tax debts, general trading, classes of obligations, all obligations incurred by the company after a point in time and long-term obligations where no basis for confidence in the company’s long-term position existed.468 The wider interpretations of s 136 are unnecessary as the conduct would fall under s 135.469 This means s 136 operates even more like s 135.
As the Supreme Court interpreted away the main factors differentiating ss 135 and 136 they appear to have tried to create a new basis for distinguishing the duties. This was largely
462 Watson and Taylor, above n 10, at 603.
463 Law Commission, above n 8, at 241-242.
464 Peace and Glory Society Ltd (in liq) v Samsa [2009] NZCA 396, at 45; Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [285]-[286]; and Howes, Revill and Clark, above n 208, at [CA136.07].
465 Cooper v Debut Homes Ltd (in liq), above n 243, at [66], Peace and Glory Society Ltd (in liq) v Samsa, above n 464, at [44]; FXHT Fund Managers Ltd (in liq) v Oberholster [2009] NZHC 435; (2009) 10 NZCLC 264,562 (HC) at [40]; Howes, Revill and Clark, above n 208, at [CA136.04]; Ross, above n 24, at 44; Watson and Taylor, above n 10, at 626.
466 Peace and Glory Society Ltd (in liq) v Samsa, above n 464, at [44]; Grant v Johnston, above n 209 at [43]; and Farrar, above n 167, at 174.
467 Debut Homes Limited (in liquidation) v Cooper, above n 2, at [91],-[96] and fn 104; and Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [272]-[287].
468 Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [283] and [459]-[460]; and
Debut Homes Limited (in liquidation) v Cooper, above n 2, at [91]-[96]
469 Conduct is discussed below; Howes, Revill and Clark, above n 208, at [CA136.01].
reflected in the remedies discussion. Section 136 has traditionally been interpreted as sharing s 135’s rationale. However, the Supreme Court held s 136 focuses on individual creditors and protects new creditors being enticed (preventing “robbing of Peter to pay Paul”). The Supreme Court felt the concern was exacerbated by dishonest directors avoiding compensation orders if they maintain a net deficit under the net deterioration approach. So, the Supreme Court stated a restitutionary approach was needed to address harm to the company under s 136.470 This distinction was unfortunately confirmed by the Court of Appeal in Mainzeal.471 Watts suggests ss 136 and 135 were meant to be “two ways of skinning a cat”.472 Forcing differences in odd ways creates issues. This is shown in Mainzeal where both courts struggled to decide which section was most appropriate.473
The changed approach to remedies and purpose does not change what s 136 covers – shown by the Supreme Court in Debut holding the same actions breached both sections.474 Like s 135 claims, claims under s 136 are brought in circumstances where directors permit the company to incur liabilities when the company is insolvent or becomes insolvent from a transaction.475 As a result, in many cases the duties are claimed (successfully) together.476
Sections 135 and 136 cover the same scenarios. This is not desirable as multiple duty breaches increases damages.477 It unfairly and unnecessarily penalises directors for the same act multiple times. Australia and United Kingdom only have one provision targeting insolvent trading, the second limb of their (civil liability) approach is the general duty of good faith.478 This enforces that only one insolvent trading duty is needed. As s 135 is generally more problematic, perhaps it is suitable to remove.479
470 Debut Homes Limited (in liquidation) v Cooper, above n 2, at [165]-[166]; for more discussion on the restituionary approach see chapter four and Heath and Whale, above n 22, at [32.3.6]; Watts, above n 277; and Watts, above n 239.
471 Yan v Mainzeal Property and Construction Limited (in liquidation), above n 2, at [296]-[297].
472 Heath and Whale, above n 22, at [32.3.6].
473 “Court of Appeal Highlights Need to Amend the Companies Act in Latest Mainzeal Decision”, above n 371.
474 Debut Homes Limited (in liquidation) v Cooper, above n 2, at [94]-[95].
475 Watson and Taylor, above n 10, at 628; and Goatlands ltd (in liq) v Borrell, above n 159, at [113].
476 Examples include Goatlands ltd (in liq) v Borrell, above n 159; Rowmata Holdings Ltd (in liq) v Hildred, above n 225; Syntax Holdings (Auckland) Ltd (in liq) v Bishop [2013] NZHC 2171; Madsen-Ries v Just (No 1) [2013] NZHC 2254; and Vance v Jefferys [2014] NZHC 1932.
477 Debut Homes Limited (in liquidation) v Cooper, above n 2, at [162], [164] and [167]; and Watson and Taylor, above n 10, at 632.
478 Licht, above n 101, at 27-28.
479 Taylor, above n 1, at 76.
B Section 131(1)
Section 131 restates the common law bona fide requirement on directors exercising their discretion. Section 131(1) imposes a duty on a director to act in good faith and in what the director believes to be the best interests of the company.480 Section 131 is fundamental to directors’ responsibilities, an overarching positive duty and a fiduciary duty. It is a broad duty, so it imposes a number of requirements that overlap with other duties.481
Section 131 is a subjective test analysing what directors honestly viewed as the company’s best interests on the facts. To act in the company’s best interests directors should identify, assess and compare options.482 For a time, the Courts’ approach became increasingly objective, requiring any belief to be reasonably held.483 This was criticised given s 131’s subjective wording.484 The Supreme Court recently rejected the objective overlay as the wording and legislative history are expressed subjectively.485 They also accepted s 131 reflects the business judgement rule.486 The Supreme Court’s s 131 approach aligns more with the long title and juxtaposes the harsh s 135 test - potentially attempting to differentiate them. However, the Court added a caveat that an irrational or unreasonable belief would breach s 131, importing a similar objective overlay to the one rejected.487
The ‘best interests of the company’ has been a key issue.488 Chapter one discussion on the corporate objective is relevant to what is ‘the best interests of the company’.489 Whilst no theoretical approach has been adopted, it has been long established the duty includes considering creditors.490 The rationale for including creditors under s 131 is shared with s
135.491 The concept developed collectively across the Commonwealth.492 Cooke J’s
480 Companies Act, s 131; and Campbell, Watts, Francis and others, above n 18, at [24.9].
481 Watson and Taylor, above n 10, at 519, 530-531 and 521; and Rosemary Langford Best Interests: Multifaceted but not Unbounded (University of Melbourne Law School, 2016) at 21.
482 Hedley v Albany Power Centre (2006) NZCLC 264,095 at [64]; and Watson and Taylor, above n 10, at 521. 483 Soujourner v Robb HC Christchurch CIV-2004-476-000568, 4 July 2006, at [102]; and Watson and Taylor, above n 10, at 525.
484 Tompkins, above n 151, at 17; and Campbell, Watts, Francis and others, above n 18, at [24.9].
485 Debut Homes Limited (in liquidation) v Cooper, above n 2, at [110] and [112].
486 Tompkins, above n 151, at 17; and Howes, Revill and Clark, above n 208, at [CA131.02].
487 Debut Homes Limited (in liquidation) v Cooper, above n 2, at [109] and [113].
488 Langford, above n 481, at 1.
489 Bede Harris “Fiduciary Duties of Directors Under the Companies Act 1993” (1994) NZLJ 242 at 414.
490 Debut Homes Limited (in liquidation) v Cooper, above n 2, at 28-32.
491 See chapter two discussion; and Van Zwieten, above n 104, at 2.
492 Licht, above n 101, at 28-29; Walker v Wimborne, above n 71; Nicholson v Permakraft (NZ) Ltd, above n 83;
Peoples Department Stores Inc. (trustee of) v Wise, above n 72; Credit Lyonnais Bank Nederland, N.V. v. Pathe
judgment in Nicholson v Permakraft is the origins of considering creditors under s 131 in the vicinity of insolvency.493 This concept continued to develop and was affirmed in later New Zealand cases even with the express enactment of the reckless trading duty.494 The Supreme Court in Debut accepted considering creditors upon insolvency and stated this means considering all creditors.495 Whilst there is academic disagreement on including creditors – the requirement is entrenched.496
Typical s 131 cases significantly overlap with s 135.497 Section 131 includes where directors have a conflict of interest with the company and act for their own or a third party’s benefit to the company’s determent, directors misusing company property, failing to consider the company’s interests (including the consider creditor concept) and allowing trading and/or improper transactions in insolvency or which cause insolvency.498 The similarities mean conduct which breaches s 131 usually breaches s 135.499 The Court of Appeal’s analysis in Debut is especially telling as ss 131 and 135 are so similar they were considered concurrently.500 Again, the Supreme Court held Cooper was liable under s 131 for the same reasons as s 135.501 Furthermore, the tests are increasingly similar with the courts requiring directors identify options available under s 135, which is required under s 131.502 Section 131 and 135 are so similar their counterparts are considered the ‘two prongs’ of the Anglo- Australian approach to directors’ insolvent trading.503
Communs. Corp., above n 71; West Mercia Safetywear Ltd v Dodd, above n 145; and Kinsela v Russell Kinsela Pty Ltd (in liq) above n 145.
493 Heath and Whale, above n 22, at [32.2.3]; and Nicholson v Permakraft (NZ) Ltd, above n 83, at 249-250. 494 For example, Robb v Soujourner [2007] NZCA 493 at [25]; and FXHT Fund Managers Ltd (in liq) v Oberholster, above n 465, at [19].
495 Debut Homes Limited (in liquidation) v Cooper, above n 2, at [28]-[31] and [177]; and Taylor, above n 1, at 172 and 177-178.
496 The controversy of including creditors was discussed in chapter one, for more see Watts, above n 277, at 61 and Heath and Whale, above n 22, at [32.3.4].
497 Cooper v Debut Homes Ltd (in liq), above n 243, at [61]; and Van Zwieten n 104, at 25.
498 FXHT Fund Managers Ltd (in liq) v Oberholster, above n 465; Robb v Soujourner, above n 494; Debut Homes Limited (in liquidation) v Cooper, above n 2; Madsen-Ries and Vance v Petera, above n 156; Hedley v Albany Power Centre, above n 482; Delegat v Norman, above n 225; Madsen-Ries v Greenhill, above n 226; and Morgenstern v Jeffreys [2014] NZCA 448.
499 William Porter “The Insolvent Trading Safe harbour Uncertainty Prevails” (2020) 25 NZBLQ 227 at 232.
500 Cooper v Debut Homes Ltd (in liq), above n 243, at [34]; Madsen-Reis v Cooper, above n 300, at 45.
501 Debut Homes Limited (in liquidation) v Cooper, above n 2, at [39], [41], [99] and [116]-[119].
502 See chapter four discussion; Hedley v Albany Power Centre, above n 482, at [64]; and Debut Homes Limited (in liquidation) v Cooper, above n 2, at [76].
503 Licht, above n 101, at 27.
These examples and analysis of the broad s 131 show it has been interpreted and applied in a way that covers s 135.
C Section 137
Section 137 is a duty owed to the company throughout its life. It states directors must exercise the care, diligence and skill a reasonable/competent director would in the circumstances. This is an objective standard.504 However, there is an aspect of subjectivity as the section also states the standard directors must meet is determined by the nature of the company, decision, director’s position/responsibilities and other relevant factors.505
Breaches of ss 135 or 136 usually breach s 137 because ss 135 and 136 are instances of the general duty of care.506 Section 135 especially overlaps with s 137 as both are objective duties that consider whether sufficient care was taken.507 Most s 137 proceedings have occurred in insolvency under s 301.508 As a result, there are many examples of breaches of s 137 arising from actions also breaching s 135.509
Again, this brings into question whether the more specific s 135 is needed when relevant wrongdoing can be covered by the broader s 137.
Conclusion
New Zealand has too many provisions.510 Sections 131, 136 and 137 show s 135 is not required to protect creditors and the company.511 As New Zealand is not a strong SP jurisdiction like Delaware, we do not need duties explicitly reminding directors of creditors. ET protects all stakeholders where their interests are relevant which means broader duties suffice. However, until ET is firmly adopted, s 135 should remain to avoid following Delaware’s ‘chaos’, especially as New Zealand has many SMEs where risks of opportunism
504 Companies Act, ss 137 and 169(3); Howes, Revill and Clark, above n 208, at [CA137.02]; and Madsen-Ries v Just, above n 476, at 31.
505 Companies Act, s 137; and Grant v Johnston, above n 209, at [36].
506 Ross, above n 24, at 47; and John Farrar “The Duty of Care of Company Directors in Australia and New Zealand” (1996) 4 CanterLawRw 228 at 231-232; and Farrar and Tennent, above n 21, at 240-241.
507 Cassidy, above n 458, at 17.
508 Watson and Taylor, above n 10, at 650.
509 Examples include Cool Cars (Wholesale) Ltd (in liq) v Sharma, above n 235; Ocean Boulevard Properties Ltd v Everest, above n 235; Rowmata Holdings Ltd (in liq) v Hildred, above n 225; Morgenstern v Jeffreys, above n 498; and Grant v Johnston, above n 209.
510 Farrar and Tennent, above n 21, at 239-240.
511 Hayne, above n 61, at 805.
are greater.512 However, the analysis also shows increased certainty and/or decreased scope of s 135 would not leave lacunas.
512 See chapter two.
Chapter Six: A Safe Harbour Solution
One common option floated to address the harshness of s 135 is a safe harbour.513 Safe harbours can be a process or defence.514 Safe harbours specify certain conduct will not violate the correlating rule. They aim to eliminate disincentives discouraging desirable behaviour and promote better behaviour.515
I Utility of COVID-19 Safe Harbours
Safe harbours were widely used during the global financial crisis. 516 So, it is unsurprising safe harbours became prevalent during COVID-19 to help directors.517 In May 2020 the New Zealand COVID-19 insolvent trading duties safe harbour was implemented.518 COVID-19 uncertainty exacerbated risks for directors continuing trade.519 The safe harbour freeing directors from liability was intended to discourage premature liquidations and help businesses survive.520 The safe harbour applied to companies who could pay debts at 31 December 2019 and companies incorporated on/after 1 January 2020 but before 3 April 2020 who acted in good faith and believed the company had or would likely have, significant liquidity problems from COVID-19, and the company would likely be able to pay debts on/after 30 September
513 Litigation Forecast 2021, above n 262, at 7; Kersey, Upson, Walker and Lamb, above n 348; and Dalkie, above n 280, at 68.
514 Business Set-up, Transfer and Closure (Productivity Commission of Australia, Inquiry Report 75, September 2015 at 380-381.
515 Elizabeth Brown “No Good Deed Goes Unpunished: Is There a Need for a Safe Harbor for Aspirational Corporate Codes of Conduct” (2008) 26 Yale.L.&.Pol’yRev. 367 at 372, 402-403 and 410-413.
516 Harris, above n 14, at 1, 8 and 11; Firew Tiba “Safe Harbour Carve-Out for Directors for Insolvent Trading Liability in Australia and it’s Implications” (2019) 53 U.S.F.L.Rev. 43 at 46 and 49; and Iris Chiu “Relief and Rescue: Suspensions and Elasticity in Financial Regulation, and Lessons from the UK’s Management of the COVID-19 Pandemic Crisis” (2021) 64 Wash.J.L.&Pol’y. 63 at 66-667.
517 Kristin Van Zwieten “The Wrong Target? COVID-19 and the Wrongful Trading Rule” (17 April 2020) Oxford Business Law Blog <www.law.ox.ac.uk>.; Mark Kleinman “Coronavirus: Ministers Race to Reform Insolvency Laws” (25 March 2020) Sky News <www.news.sky.com>.; Lichat, above n 101, at 18 and 31; Damian Schade “2020 New Zealand Insurance Market Recap Series – Liability” (17 December 2020) Marsh
<www.marsh.com>.; Institute of Directors New Zealand and ASB, above n 407, at 4-5 and 6; COVID-19 Response (Further Management Measures) Legislation Bill (244-1) (explanatory note); Lidia Xynas and Alexander Xynas “Insolvency and the Australian Safe Harbour Reforms of 2017 – Do they Adequately Support all Australian Directors in Fulfilling their Role as a Fiduciary of their Company in 2021?” (2021) 36 AJCL 1; and Noel McCoy A COVID-19 Directors’ Guide to Avoiding Personal Liability in Circumstances of a Company’s Financial Distress and Possible Insolvency (Norton Rose Fulbright, September 2020)
518 COVID-19 Response (Further Management Measures) Legislation Act 2020 sch 3; Companies Act, sch 12; Porter, above n 499, at 228.
519 Holden, Marcetic and others, above n 374, at 1; and Arthur and Lethbridge, above n 183, at 19.
520 David Webb, Shawni Hadfield and others “COVID-19: Temporary ‘Safe Harbour’ Provisions for Directors: An Update to the Companies Act 1993” (12 May 2020) Deloitte <www2.deloitte.com>.; Van Zwieten, above n 517; Companies Act, sch 12 cl 1; COVID-19 Response (Further Management Measures) Legislation Bill (244-
1) (explanatory note), above n 517, sch 2 pt 2.
2021.521 In forming their opinion, directors could consider the likelihood of conditions improving, reaching an arrangement with creditors and other relevant matters. But, the safe harbour excluded truly reckless trade – unsalvageable ‘zombie companies’.522 Other duties still applied, and directors needed to make careful assessments.523 The broader approach, subjective element and exclusion of only truly reckless conduct aligns with the pragmatic approach. The safe harbour also does not focus on insolvency (liquidity is preferred).524 This means the safe harbour avoids the issues the s 135 approach suffers in this respect.525 If a strict solvency test had been used it is unlikely directors would have relied on the safe harbour due to the difficulties calculating solvency in uncertain times. This safe harbour gave directors time to seek advice and plan.526
However, there have been criticisms of the safe harbour. For example, that more guidance was needed, the interaction of the safe harbour with other duties was unclear and it did not contain a long-term focus.527 But, this safe harbour passed under urgency to lessen the burden and uncertainty of COVID-19, not absolve directors of all duties nor apply in the long- term.528 Any permanent safe harbour would require more precision, deeper consideration of surrounding provisions and long-term considerations. However, the COVID-19 safe harbour shows progress in the right direction and provides a starting point for New Zealand to develop from.
Rather, the major criticism of the safe harbour should be that it was temporary.529 As the year did not end in the dire state predicted, the safe harbour was not extended. But, COVID-19’s impacts may be long-lasting.530 Furthermore, needing a safe harbour highlights the draconian nature of s 135, it should be able to apply in all circumstances.531 A safe harbour would also
521 Companies Act, sch 12 cl4-6.
522 Companies Act, sch 12 cl 1; and Porter, above n 499, at 231-232.
523 Webb, Hadfield and others, above n 520; Schade, above n 517; Holden, Marcetic and others, above n 374, at 4; and Arthur and Lethbridge, above n 183, at 19.
524 Porter, above n 499, at 231-232.
525 See chapter four.
526 Litigation Forecast 2021, above n 262, at 5; and Webb, Hadfield and others, above n 520.
527 For more criticisms of the safe harbour see Porter, above n 499, at 231-233.
528 Van Zwieten, above n 517.
529 Companies Act, sch 12 cl 5 .
530 Litigation Forecast 2021, above n 262, at 3, 5 and 7; Holden, Marcetic and others, above n 374, at 4; and Institute of Directors New Zealand and ASB, above n 407, at 12.
531 Watts, above n 239, at 1.
align s 135 with the CA’s rescue goal by encouraging restructuring. Permanent reform is warranted.532
II Lessons from Australia’s Safe Harbour
Australia has a permanent safe harbour to balance out their stringent insolvent trading duty.533 The duty forces directors to enter fatal formal mechanisms on suspicion of insolvency. Like s 135, this made directors risk-averse, and prematurely liquidate.534 The safe harbour intends to combat this and encourage informal restructuring and entrepreneurship.535
The safe harbour facilitates informal restructuring by excluding personal liability under s 588G if, after a director suspects the company may become or be insolvent, they start developing actions reasonably likely to lead to a better outcome for the company than immediate administration or liquidation and debt is incurred directly or indirectly with that action.536 This moves focus to directors conduct rather than solely on the timing of insolvency.537 There is no set time period for the safe harbour, it is fact-dependent.538 This allows qualifying companies to continue trading and incurring debts. The safe harbour is not defeated by a failed result. This considers the unpredictable nature of restructuring processes.539 The safe harbour excludes directors who failed to pay employees and meet tax obligations within the previous 12 months.540 Australia’s safe harbour gives directors ‘breathing space’, reduces the stigma surrounding financial difficulties, encourages
532 Litigation Forecast 2021, above n 262, at 7; and Arthur and Lethbridge, above n 183, at 19.
533 Corporations Act 2001 (AU), ss 588G and 588GA.
534 Jason Harris “Reforming Insolvent trading to Encourage Restructuring: Safe Harbour of Sleepy Hollows?” (2016) JBFLP 294 at 294-295; Helen Anderson "Shelter from the Storm: Phoenix Activity and the Safe Harbour" (2018) 41 MelbULawRw 999 at 1003-1004; and Tiba, above n 516, at 44-45 and 59-60.
535 Robert Boadle “The New Insolvent Trading Defence: Striking a Better Balance for Creditors and Directors” (2017) 39 LSJ 72 at 72-73; Tiba, above n 516, at 48; and Business Set-up, Transfer and Closure, above n 514, at 373-379; and Treasury Laws Amendment (2017 Enterprise Incentive No.2 Bill) Bill 2017 (No. X) (explanatory note) at 5-8.
536 Corporations Act, s 588GA; Farid Assaf, Tim Bednall and others Australian Corporation Law Principles and Practice (loose-leaf ed, LexisNexis) at [3.2A.0333].
537 Treasury Laws Amendment (2017 Enterprise Incentive No.2 Bill) Bill 2017 (No. X) (explanatory note), above n 535, at 8-11-13; Review of the Insolvent Trading Safe Harbour (Treasury of Australia, Consultation paper, September 2021) at 7; and Xynas and Xynas, above n 517, at 20.
538 Assaf, Bednall and others, above n 536, at [3.2A.0333]; and Corporations Act, s 588GA(1)(b)(i)-(iv).
539 Sam Marsh and Shane Roberts “Insolvency Safe Harbour for ‘Honest’ Directors” (2017) Gov.Dir.J. 275 at 275 and 277-279.
540 Corporations Act, s 588GA(4).
proactivity, taking reasonable risks, encourages directors to remain in control and avoid premature liquidations.541
Whilst the safe harbour was welcomed, it was imperfect.542 Some of the main criticisms are as follows. The safe harbour is inaccessible to SMEs who experience delays in meeting employee and tax requirements.543 There was disappointment insolvency remained a key element as the difficulties related to the ‘insolvency’ tests still characterised the Australian approach.544 Not mandating consultation with qualified experts in the safe harbour has also been criticised. Directors who do not consult experts are in the same position as before the safe harbour. Experts provide important guidance and objectivity.545 Furthermore, the safe harbour does not achieve a restructuring culture because it only addresses one issue in Australia’s legal landscape.546 Nor did anything change to help the process of informal restructuring, a process safe harbour would have been preferable.547 One of the main criticisms is the lack of clarity and complexity. For example, the safe harbour’s duration and ‘better outcome’ is unclear.548 There is too much flexibility, directors want additional guidance.549
Whilst the safe harbour is impeded by factors unique to Australia, it shows New Zealand’s legislature clarity, inclusivity, qualified experts, cohesion with surrounding provisions, addressing underlying issues and moving away from insolvency are desirable.
541 Xynas and Xynas, above n 517, at 20; Lisa Filippin and Alan Mitchell “Eligibility for Safe Harbour: Practical Considerations for Directors, Advisers and External Administrators” (2019) ARITAJ 27 at 27; and Treasury Laws Amendment (2017 Enterprise Incentive No.2 Bill) Bill 2017 (No. X) (explanatory note), above n 535, at
8-11.
542 s 588HA; Review of the Insolvent Trading Safe Harbour (Treasury of Australia, Consultation paper, September 2021); and Xynas and Xynas, above n 517, at 1.
543 Ashley Black, judge of the Supreme Court of New South Wales “Recent Developments in Insolvency Law” (Speech presented to the Australian Restructuring Insolvency and Turnaround Association National Conference, 9 August 2017) at 7-9; and Ian Ramsay and Stacey Steele The ‘Safe Harbour’ Reform of Directors’ Insolvent Trading Liability in Australia: Insolvency Professionals’ Views (Melbourne University Law School, 2020) 1t 15-16.
544 Tiba, above n 516, at 51.
545 Ramsay and Steele, above n 543 at 19 and 25-26; Xynas and Xynas, above n 517, at 26-27; and Taylor, above n 1, at 194-195.
546 At 1005-1006; Tiba, above n 516, at 49; and Harris, above n 534, at 301-302.
547 Anil Hargovan “The New Insolvency Provisions are Yet to Make an Impact” (21 November 2018) University of New South Whales Business School <www.unsw.edu.au>.; and Tiba, above n 516, at 61-62.
548 For more on areas of uncertainty see Harris, above n 534, at 295; Xynas and Xynas, above n 517, at 21-26; Boadle, above n 535, at 73; and Assaf, Bednall and others, above n 536, at [3.2A.0333]; Hargovan, above n 547. 549 Hargovan, above n 547; Ramsay and Steele, above n 543, at 19 and 21.
III Harmonisation
A safe harbour is also attractive as it would help align New Zealand with Australia.550 Harmonisation creates certainty, consistent treatment and decreased costs.551 Harmonisation is important for companies operating in both countries. Undertaking Australia’s safe harbour likely breaches s 135 based on Debut’s stance on informal restructuring and insolvent trading. This may impede Trans-Tasman activity.
Conclusion
The COVID-19 safe harbour showed s 135 is not fit for purpose. The criticisms of Australia’s provision provide important lessons. They should not dissuade consideration of a safe harbour as Australia has unique issues. To remedy concerns the underlying issue needs to be addressed. In Australia the underlying issue is the collection/group of statutory liabilities, whereas in New Zealand, the issue is s 135 itself. The other key difference is the goal. Australia’s goal was encouraging informal restructuring whereas New Zealand’s goal should be mitigating draconian liability for honest directors. The former targeting a process, the latter a defence.
A permanent New Zealand safe harbour should be introduced after s 135 itself has been reshaped along pragmatic lines to ensure the safe harbour does not fall on the current issues.552 Whilst New Zealand’s COVID-19 safe harbour is imperfect, it is a good start. Providing time frames, guidance on actions, being inclusive, introducing a ‘friendlier’ subjective standard cohesive with s 131, only excluding truly reckless conduct and moving away from focusing on insolvency should be retained. These fit with the pragmatic approach, provide flexibility and support rescue. Further guidance, long-term thinking and requiring qualified expert advice would also be beneficial.
550 The Australia – New Zealand Closer Economic Relationship (Ministry of Foreign Affairs and Trade, 2005) at 31-32; and Harmonisation of Legal Systems Within Australia and Between Australia and New Zealand (House of Representatives Standing Committee on Legal and Constitutional Affairs, November 2006) at 28 and 30-39. 551 At 5-8.
552 Harris, above n 543, at 295.
Conclusion
Section 135 requires amendment. The provision is poorly formulated, employing elusive terms from a highly criticised test that does not connect well to the ‘reckless trading’ rationale of the duty nor the entity focus. This makes it difficult for directors to know the obligation imposed. But, prima facie, the wording imposes a strict liability negligence type obligation. Such an overbearing provision leads to the typical inefficiency consequence of reckless trading duties. It stifles legitimate business activity by causing risk aversion and a shortage of qualified directors.
This left the courts with the burden of making the provision ‘work’. The objective broad wording gave courts large discretion. After initial disagreement, the courts moved towards a pragmatic approach. This approach balanced business judgement and realities with the objective nature of the provision. This pragmatic approach meant only genuinely reckless behaviour was caught. However, recent judgments, specifically Debut and Mainzeal, show divergence and therefore uncertainty remains. Both decisions stray from the pragmatic approach and entity focus of s 135. The strict decisions mean directors effectively give creditors guarantees of solvency. This gave life to commentators’ fears. Such an approach does not comport with the realities of business where decisions require balancing risk and reward, focus on the company and occur in a volatile environment. The utility of the company as a risk-taking vehicle through separate legal identity is diminished. The approach makes s 135 unworkable in practice and does not fulfil the CA’s dual-purpose of encouraging business risk/judgement and protection of stakeholders nor the entity focus.
The immediate negative impacts of this have been felt in New Zealand’s D&O insurance market, director sentiment and class action environment.
The law is currently uncertain, does not support rescue, does not promote efficiency nor uphold separate legal identity. It is excessively flexible (enabling disparate rulings) and overbearing.
A solution is needed. Rewording the provision, removing the provision and including a safe harbour were discussed.
In deciding the appropriate remedy, reference to underlying principles and theory are important. Certainty, flexibility, efficiency, fairness, separate legal identity, limited liability and a rescue culture all need to be given effect in company law. As the reckless trading duty cases and s 135 provision show – this is a difficult balance to strike. Underlying theory on the corporate objective guides the law. The CA is similar to an ET approach. Under this conception s 135 should move away from insolvency and creditors and towards an entity view encouraging legitimate risks for value maximisation and rescue for sustainability.
As a result, the suggested remedy is a combination of amending s 135, imposing a safe harbour and including a directors’ duties purpose section. Whilst the overlapping duties makes removing the provision viable, s 135 should not be removed until ET has been mandated, to avoid the chaos that Delaware experienced. This dissertation has stayed within the bounds of company law and focused on the company. Without full analysis of interconnected areas of law, it is unwise/impossible to make concrete recommendations on how to resolve all s 135’s issues. Prima facie, the provision itself should entrench the pragmatic approach to refocus on true reckless conduct. This involves recognising business reality, orthodoxy and judgement, allowing the balancing of risk commensurate with reward and time for decision-making. This will help only capture illegitimate conduct. Amendment should reinforce the movement away from an insolvency/creditor focus and affirm an entity approach and net deterioration damages calculation. Whilst amending s 135 could be enough, leaving the judiciary substantial discretion with s 135 has proven problematic. To avoid repetition of similar issues a safe harbour should be implemented. The COVID-19 safe harbour is a good start. A directors’ duties purpose section containing the long title would help show courts the CA’s dual-purpose applies to s 135.
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Andrew Keay “The Ultimate Objective of the Company and the Enforcement of the Entity Maximisation and Sustainability Model” (2010) 10 J. Corp. Law Stud 35
Andrew Keay “Risk, Shareholder Pressure and Short-Termism in Financial Institutions: Does Enlightened Shareholder Value Offer a Panacea?” (2011) 5 Law Financial Mark. Rev. 435 Andrew Keay and Rodoula Adamopoulou “Shareholder Value and UK Companies: A Positivist Inquiry” (2012) 13 Eur. Bus. Organ. Law Rev. 1
Andrew Keay “Wrongful Trading: Problems and Proposals” (2014) 65 NILQ 63
Andrew Keay “The Shifting of Directors’ Duties in the Vicinity of Insolvency” (2015) 24 Int.Insolv.Rev 140
Andrew Keay and Joan Loughrey “ The Framework for Board Accountability in Corporate Governance” (2015) 35 Legal Stud 252
Andrew Keay “Financially Distressed Companies, Restructuring and Creditors’ interests: what is a Director to do?” (2019) LMCLQ 297
Andrew Keay and Joan Loughrey “The Concept of Business Judgment” (2019) 39 Leg Stud 36
Andrew Keay, Joan Loughrey and others “Reviewing Directors’ Business Judgements: Views from the Field” (2020) 47 J.L.& Soc.639
Andrew Keay , Joan Loughrey and others “Business judgment and director accountability: a study of case-law over time” (2020) 20 J. Corp. Law Stud. 359
Brian Keene “Directors’ Powers and Duties” (2010) NZLJ 162
Amir Licht “My Creditor’s Keeper: Escalation of Commitment and Custodial Fiduciary Duties in the Vicinity of Insolvency” (2021) ECGI 1
Phillip Lipton “ The Introduction of Limited Liability into the English and Australian Colonial Companies Acts: Inevitable Progression or Chaotic History?” (2018) 41 Melb Univ Law Rev 1278
Sean Lyons “Value Preservation Increasingly Acknowledge as Primary Purpose and Fiduciary Duty” (2021) SSRN 1
Sam Marsh and Shane Roberts “Insolvency Safe Harbour for ‘Honest’ Directors” (2017) Gov.Dir.J. 275
Sam Marsh and Shane Roberts “Personal Liability for Insolvent Trading: Company Directors Find Berth in Safe Harbour” (2017) Gov.Dir.J. 611
Allan McRae “Reckless Trading” (2019) NZLJ 419 Allan McRae “Reckless Trading” (2019) NZLJ 349 Allan McRae “Reckless Trading” (2020) NZLJ 30
Sneha Mohanty and Vrinda Bhandari “The Evolution of the Separate Legal Personality Doctrine and Its Exceptions: A Comparative Analysis” (2011) 32 Comp.Law. 194 Gabriel Moss “Comparative Bankruptcy Cultures: Rescue or Liquidation: Comparison of Trends in National Law—England” (1997) 23 Brook. J. Int'l L. 115
Gabriel Moss “No Compensation for Wrongful Trading – Where Did it All Go Wrong?” (2017) 30 Insolv.Int. 49
Chris Noonan and Susan Watson “The Foundations of Corporate Governance in New Zealand: A Post-Contractualist View of the Role of Company Directors” (2007) 22 NZULR 649
William Porter “The Insolvent Trading Safe harbour Uncertainty Prevails” (2020) 25 NZBLQ 227
Oksana Pryshchepa, Kevin Aretz and Shantanu Banerjee “Can Investors Restrict Managerial Behavior in Distressed Firms?” (2013) 23 J. Corp. Finance 222
John Quinn “The Duty to Act in the Interests of the Company: Simply a Duty to Increase Shareholder Wealth?” (2015) 7 UCD Working Papers 1
Edward Rock “For Whom is the Corporation Managed in 2020?: The Debate over Corporate Purpose” (2020) 515 ECGI 1
Mike Ross “Trade or Bust” (2001) NZLJ 454
Mike Ross “Assessing Damages for Reckless Trading” (2002) NZLJ 178
Len Sealy “Directors’ ‘Wider’ Responsibilities – Problems Conceptual, Practical and Procedural” (1987) 13 MonashULawRw 164
Len Sealy “Reforming the Law on Directors’ Duties” (1991) 12 Comp.Law 175 Len Sealy “Director’s Duties Revisited” (2001) 22 Comp.Law 79
Simone Sepe “Directors' Duty to Creditors and the Debt Contract” (2007) 1 J. Bus. & Tech. L. 553
Mark Story “Māori Governance: Meeting the Cultural Challenge” (2005) 25 NZM 7 Lynn Stout “ On the Rise of Shareholder Primacy, Signs of Its Fall, and the Return of Managerialism (in the Closet)” (2013) 36 Seattle Univ. Law Rev. 1169
Lynne Taylor “Funding Insolvent Company Claims” (2013) 25 NZULR 587
Lynne Taylor “Directors’ Duties on Insolvency in New Zealand: an Empirical Study” (2019) 28 NZULR 171
Linda Te Aho “Corporate Governance: Balancing Tikanaga Māori with Commercial Objectives” (2005) 8 Yearb.N. Z.jurisprudence 300
Firew Tiba “Safe Harbour Carve-Out for Directors for Insolvent Trading Liability in Australia and it’s Implications” (2019) 53 U.S.F.L.Rev. 43
David Tompkins “Directing the Directors: the Duties of Directors under the Companies Act 1993” (1994) 2 WkoLawRw 13
Kristin Van Zwieten “Disciplining the Directors of Insolvent Companies: Essay in Honour of Gabriel Moss QC” (2020) 33 I.I.J. 2
Seppo Villa “ Creditor Protection and the Application of the Solvency and Balance Sheet Tests under the Company Laws of Finland and New Zealand” (2008) 1
Sara Wahl “Creditors vs. Directors and Officers: D&O Insurance – Panacea or Tar Baby?” (2003) 24 Andrews' Bank & Lender Liab. Litig. Rep. 16
Susan Watson and Chris Noonan “The corporate shield: What happens to directors when companies fail?” (2005) Auckl.Univ.Law.Rev. 27
Susan Watson “How the Company Became an Entity: A New Understanding of Corporate Law” (2015) 120 J. Bus. Law. 1
Susan Watson “Corporate Law and Governance” (2018) 2 NZLR 275
Susan Watson “The Corporate Legal Person” (2019) 19 J. Corp. Law Stud.137
Peter Watts “Company Contract, and Reckless Trading: Re Global Print Strategies Ltd” (2009) 15 NZBLQ 3
Peter Watts "Debut Homes in the Supreme Court—a Product of the Vicarage?” (2020) CSLB 107.
Peter Watts “Directors’ Duties after Debut Homes – A Return to the Scene” (2021) 6 CSLB 55
Peter Watts “Why as a Matter of English-Law Principle Directors Do Not Owe a Duty of Loyalty to Creditors Upon Insolvency” (2021) 2 J.B.L. 103
Joseph Williams “Lex Aotearoa: An Heroic Attempt to Map the Māori Dimension in Modern New Zealand Law” [2013] WkoLawRw 2; (2013) 21 Wai.L.Rev. 1
Lidia Xynas and Alexander Xynas “Insolvency and the Australian Safe Harbour Reforms of 2017 – Do they Adequately Support all Australian Directors in Fulfilling their Role as a Fiduciary of their Company in 2021?” (2021) 36 AJCL 1
Aisha Yaqoob “Two Fundamental Principles of Company Law?” (1997) 18 Comp.Law. 14 Jacob Ziegel “Creditors as Corporate Stakeholders: The Quiet Revolution - An Anglo- Canadian Perspective” (1993) 43 UTP 511
Kristin van Zwieten “ Director Liability in Insolvency and its Vicinity” (2018) 38 Oxf. J. Leg. Stud.382
E Parliamentary and Government Materials
(15 December 1992) 532 NZPD(23 February 1993) 533 NZPD
(21 September 1993) 538 NZPD
Companies Bill 1900 (50-1) (Select Committee Report)
COVID-19 Response (Further Management Measures) Legislation Bill (244-1) (explanatory note)
Departmental report to the Epidemic Response Committee (MBIE, 11 May 2020) Epidemic Response Committee “COVID-19 Response (Further Management Measures) Legislation Bill” (May 2020)
Inland Revenue Department Income Tax and Goods and Services tax – Director’s liability and the COVID-19 “safe harbour” in schedule 12 to the Companies Act 1993 (Public Ruling BR PUB 20/06)
Law Commission Company Law, a Discussion Paper (NZLC PP5, 1987) Law Commission Company Law Reform and Restatement (NZLC R9, 1989)
Law Commission Company Law Reform: Transition and Revision (NZLC, R16, 1990) Law Commission Insolvency Law Reform: Promoting Trust and Confidence – An Advisory Report to the Ministry of Economic Development (NZLC, SP11, 2001)
Special Committee to Review the Companies Act Final Report of the Special Committee to Review the Companies Act (1973)
Australian Government Response to the Productivity Commission Inquiry into Business Set- Up, Transfer and Closure (Australian Government, May 2017)
Business Set-up, Transfer and Closure (Productivity Commission of Australia, Inquiry Report 75, September 2015
Harmonisation of Legal Systems Within Australia and Between Australia and New Zealand (House of Representatives Standing Committee on Legal and Constitutional Affairs, November 2006)
Parliamentary Joint Committee on Corporations and Financial Services Litigation Funding and the Regulation of the Class Action Industry (Senate Printing Unit, December 2020) Review of the Insolvent Trading Safe Harbour (Treasury of Australia, Consultation paper, September 2021)
Treasury Laws Amendment (2017 Enterprise Incentive No.2 Bill) Bill 2017 (No. X) (explanatory note)
F Reports
Christopher Cowton Putting Creditors in Their Rightful Place: Corporate Governance and Business Ethics in the Light of Limited Liability (University of Huddersfield Business School)
Doing Business in Canada (Fasken Martineau DuMoulin LLP, 2019)
Selwyn Eathorne Submission on the Law Commission’s Issues Paper on Class Actions and Litigation Funding (Institute of Directors New Zealand, March 2021)
Sean Gamble Construction’s Insolvency Predicament: Cooper, Mainzeal and Reckless Trading (Hesketh Henry)
Sam Holden, Janko Marcetic and others Litigation & Dispute Resolution – Trends and Insights (Chapman Tripp, August 2020).
The Insolvency Safe Harbour (Australian Institute of Company Directors)
Institute of Directors New Zealand and ASB Director Sentiment Survey 2020 (Institute of Directors, December 2020)
Rachel Jones, Erin Matariki Carr and Liam Stoneley Te Ao Māori Trends and Insights
(Chapman Tripp, June 2017)
Rosemary Langford Best Interests: Multifaceted but not Unbounded (University of Melbourne Law School, 2016)
Litigation Forecast 2021 (MinterEllisonRuddWatts, February 2021)
London School of Economics Study on Directors’ Duties and Liability (European Commission, April 2013)
Noel McCoy A COVID-19 Directors’ Guide to Avoiding Personal Liability in Circumstances of a Company’s Financial Distress and Possible Insolvency (Norton Rose Fulbright, September 2020)
Christie McGrath Managing Insolvency (ACID, November 2020) MinterEllissonRuddWatts, Marsh and Institute of Directors New Zealand Directors and Officers Insurance: Trends and Issues in Turbulent Times (Institute of Directors New Zealand, June 2019)
Overview of the Australian Insolvent Trading Prohibition and the Safe Harbour Protections
(Baker McKenzie, 2020)
Ian Ramsay and Stacey Steele The ‘Safe Harbour’ Reform of Directors’ Insolvent Trading Liability in Australia: Insolvency Professionals’ Views (Melbourne University Law School, 2020).
Responsibilities of Directors in Canada (Torys LLP, 2009)
Stakeholder Governance – A Call to Review Directors’ Duties (New Zealand Institute of Directors and MinterEllisonRuddWatts, 2021)
The Australia – New Zealand Closer Economic Relationship (Ministry of Foreign Affairs and Trade, 2005)
Valmaine Toki Culture – the Foundation of Māori Governance (Chartered Secretaries New Zealand, 2013)
G Dissertations
John Bovaird Brennan “The Companies Act 1993 and Common Law Directors’ Duties to Creditors: The Demise of Redundant Judicial Sympathies” (LLM Research Paper, University of Victoria, 1995)Sofia Cvitanovich “Directing the Company in a Changing Climate” (LLB (Hons) Dissertation, University of Otago, 2020)
H Internet Resources
“About the Panel” Takeovers Panel Te Pae Whitimana <www.takeovers.govt.nz>. Scott Barker, Bridie McKinnon and Luke Sizer “Court of Appeal Delivers MainzealDecision: Significant Implications for Insolvent Trading” (1 April 2021) Buddle Findlay
Iris H-Y Chiu “Relief and Rescue Policies in Financial Regulation at the Time of the Pandemic” (4 February 2021) Oxford Business Law Blog <www.law.ox.ac.uk>. “Court of Appeal Highlights Need to Amend the Companies Act in Latest Mainzeal Decision” (7 April 2021) Duncan Cotterill <www.duncancotterill.com>.
“Directors’ Duties in Canada: Considerations in Emergency Situations” (1 April 2020) Dentons <www.dentons.com>.
Sean Gollin “Court of Appeal Confirms Liability of Mainzeal Directors” (31 March 2021) MinterEllisonRuddWatts <www.minterellison.co.nz>.
Richard Gordon “Directors' duties and the case for vulnerable trading?” (17 July 2019) MinterEllisonRuddWatts <www.minterellison.co.nz>.
Anil Hargovan “The New Insolvency Provisions are Yet to Make an Impact” (21 November 2018) University of New South Whales Business School <www.unsw.edu.au>.
Matt Kersey, Jeremy Upson, Nathaniel Walker and Gordon Lamb “Mainzeal Judgement: Court of Appeal Finds Directors Liable with Quantum Still to be Clarified” (6 April 2021) Russell McVeagh <www.rusellmcveagh.com>.
Mark Kleinman “Coronavirus: Ministers Race to Reform Insolvency Laws” (25 March 2020) Sky News <www.news.sky.com>.
Amir Licht “My Creditor’s Keeper: Escalation of Commitment and Custodial Fiduciary Duties in the Vicinity of Insolvency” (23 November 2020) Oxford Business Law Blog
Damian Schade “2020 New Zealand Insurance Market Recap Series – Liability” (17 December 2020) Marsh <www.marsh.com>.
“The Mainzeal Collapse and What Could’ve Been Done Differently” (1 March 2019) Duncan Cotterill <www.duncancotterill.com>.
Kristin Van Zwieten “The Wrong Target? COVID-19 and the Wrongful Trading Rule” (17 April 2020) Oxford Business Law Blog <www.law.ox.ac.uk>.
David Webb, Shawni Hadfield and others “COVID-19: Temporary ‘Safe Harbour’ Provisions for Directors: An Update to the Companies Act 1993” (12 May 2020) Deloitte
<www2.deloitte.com>.
“Small Business” Ministry of Business, Innovation and Employment <www.mbie.govt.nz>.
I Other Resources
Michael Arthur and Jacque Lethbridge “In short: Debut Homes ltd – Implications for Directors” (paper presented to New Zealand Law Society Council of Legal Education, Auckland, December 2020)
Farid Assaf, Tim Bednall and others Australian Corporation Law Principles and Practice
(loose-leaf ed, LexisNexis)Ashley Black, judge of the Supreme Court of New South Wales “Recent Developments in Insolvency Law” (Speech presented to the Australian Restructuring Insolvency and Turnaround Association National Conference, 9 August 2017)
Neil Campbell, Peter Watts, Kim Francis and others Morison’s Company and Securities Law
(loose-leaf ed, LexisNexis)Julie Cassidy “Superfluous or Superlative: The Role of Reckless/Insolvent Trading prohibitions in New Zealand, Australian and South African Directors’ Duties Regimes” (paper presented to the Corporate Law Teachers Association Annual Conference, Melbourne, February 2020)
Roderick S Deane “Besieged by Duties – Wil the New Companies Act Work for Directors” (paper presented to the Company Law Conference, 1994)
Sian Elias, Chief Justice of the Supreme Court of New Zealand “Righting Environmental Justice” (paper presented to the Resource Management Law Association Salmon Lecture, July 2013)
Jared Ellias and Robert Stark “Delaware Corporate Law and the ‘End of History’ in Creditor Protection” (research paper, UC Hastings, 2020) (forthcoming)
Susan Glazebrook, judge of the Supreme Court of New Zealand “ Statutory interpretation, tax avoidance and the Supreme Court: reconciling the specific and the general” (paper presented to the New Zealand Institute of Chartered Accountants Tax Conference, Auckland, 2013) Paul Heath and Michael Whale ed Heath and Whale on Insolvency (loose-leaf ed, LexisNexis)
Linda Howes, Stephen Revill and Kath Clark Company Law (loose-leaf ed, Thomson Reuters)
Madsen-Reis v Cooper [2019] NZSC Trans 23.
Hugh Rennie and Peter Watts “Directors’ Duties and Shareholders’ Rights” (paper presented to the New Zealand Law Society, 1996)Helen Winkelmann, Susan Glazebrook, and Ellen France, judges of the Supreme Court of New Zealand “Climate Change and the Law” (paper presented to the Asia Pacific Judicial Colloquium, Singapore, 2019)
Wolters Kluwer “What’s New, March 2020” (case updates, March 2020)
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