Importance of updating company address details on the Companies Register
It is important to keep the company’s address details on the Companies Register updated at all times. Yet, we often come across situations where this does not happen, and what seems like a small omission may lead to serious consequences. For example, important legal documents can be missed, and consequently, judgment can be entered into against the company without the company’s knowledge. Further, there can be personal consequences for company directors under the Companies Act 1993 (“the Act”) if the registered address is unmanaged.
Requirement under the Act
A company must always have:
A physical registered office in New Zealand. This is the address where the company’s records (described under s 189 of the Act) are stored.
A physical address for service in New Zealand, which can be the same as the registered office or another place. This is the address where legal documents are served.
The registered office and address for service of a company at any particular time are the places that are described as those on the Companies Register at that time. This information is publicly available on the Companies Register website.
Subject to the company’s constitution, the Board of the Company can change the registered office or addresses for service at any time. If the registered office or address for service change, then notice of that change (in the prescribed form) must be given to the Registrar of Companies. Otherwise, the registered office or address for service will remain in the previous place specified on the Companies Register.
Also, s 188 of the Act allows the Registrar of Companies to require a company to change its registered office by notice in writing. In such a case, a company will have two options: change its registered office by the date stated in the notice; or appeal to the Court. Failure to comply with s 188 is an offense and renders every director of the company liable on conviction to a fine not exceeding $5,000.
If the company’s records are moved to a location other than the registered office, a notice of this must be given to the Registrar of Companies within 10 working days. If the company fails to comply with this requirement, the company and every director personally commit an offense and are liable on conviction to a penalty not exceeding $10,000.
Risks of not updating address details
Section 387 of the Act prescribes how documents in legal proceedings are to be served on New Zealand registered companies. There are several options to serve, however, service by leaving the documents at the company’s registered office or address for service are the most commonly used options. If the office is closed, the documents in question can simply be affixed to the front door.
As a result, if the company’s office or address for service is not updated, the company may risk missing essential legal documents, notices, and deadlines and be subjected to a judgment entered against them or, worse, liquidation proceedings. In our experience, unfortunately, this is common. While in certain circumstances it could be possible to reverse judgment or order that was entered into without the company knowing it, this process is expensive and procedurally complicated as an application to Court would be required.
If any of the addresses are in a building with other businesses, it is equally important to provide full details of the address, such as the level of the building, office number, and/or name. If no details are provided, the service of documents could be conducted anywhere in the building. This could again result in the essential documents being unnoticed by the company.
If the company suffers a detriment as a result of the addresses not being properly maintained on the Companies Register, the director could be personally liable for breach of his director duties.
It is also important to ensure that the address that is stated as the company’s office or the address for service is checked regularly. Some documents, such as statutory demands, when served, have a very strict and short timeframe for compliance, or making an application to set it aside. If that time lapses, the consequences could be serious as there is a risk that the company will be liquidated. If the address is not checked regularly (for example, staff usually work offsite), it is recommended that the registered office and/or address for service are at another location, such as the accountant’s or solicitor’s office.
Our expert receivership lawyers assist clients to navigate this process throughout New Zealand. There are many pitfalls if implemented incorrectly.
Please refer to our People for more information on who we are, our experience, and how we can help you.
Bankruptcy is an incredibly onerous process; upon adjudication, all property belonging to the bankrupt or vested in the bankrupt automatically vests in the Official Assignee (OA) (s 101 Insolvency Act 2006 (the Act)). The definition of property under the Act is wide and includes “property of every kind, whether tangible or intangible, real or personal, corporeal or incorporeal, and includes rights, interests, and claims of every kind in relation to property however they arise” (s 3(1)). As a result, shares in a company are included in this definition.
Context
We have recently been engaged to act for the spouse of a discharged bankrupt. Our client and their spouse both held 50% shareholding in a company that was essentially their retirement fund. Upon bankruptcy, 50% of the shareholding vested in the OA pursuant to s 101 of the Act. As there was no shareholders’ agreement for the company, there were very few restrictions on what could be done with the shares.
What happened
The OA wanted to realize the value of the shares that the bankrupt held in the company for the benefit of the creditors of the bankrupt. The OA offered to sell the shares to the remaining shareholder (our client) for circa $110,000.00 and warned that the OA would take steps to either liquidate the company or sell the shares on the open market, if this offer was not accepted. The basis of the OA’s valuation of the company’s shares was to simply ascertain the value of the net assets of the company. After calculating the value of the net assets, the OA then halved this to represent the 50% shareholding it held and then adjusted this figure for the shareholders’ current accounts.
The previous advisors of our client recommended accepting the value prescribed to the shares by the OA.
Upon being engaged by the client, we ascertained that:
The company had only been able to retain a level of value in the assets it owned due to the efforts, including unpaid work, of our client and the spouse.
They had not received any remuneration for work carried out for the company since its incorporation, over 20 years ago.
Taking a simple net asset position divorced from all other factors is not a reliable method of assessing the value of shares in a company in these circumstances.
As our client’s spouse had been adjudicated bankrupt and no longer eligible to be a director, this left our client as the sole director of the Company, and subsequently, our client had the power to set the director’s remuneration pursuant to s 161 of the Companies Act 1993. In such circumstances, any excess in the company could simply be remunerated to our client, making the shares worthless even with the net asset valuation method. The company was not simply profitable without our client’s unpaid services as a going concern.
We explained these concerns to the OA. After negotiations, our client was able to purchase the shares at a fraction of the amounts that the OA had been offering, which was also in full and final settlement of any claims that the OA may have had against our client and the company.
Key takeaways
This case demonstrates the importance of having a comprehensive shareholders’ agreement in the event a situation as this occurs, and also to obtain a valuation before purchasing items like shares, the value of which is not always obvious.
Most commonly, receiverships commence when a secured creditor appoints a receiver to a company in cases where the company owes funds but fails to pay on time, or the company is in another kind of default to the secured creditor. The Court can also appoint a receiver in certain circumstances but this does not occur as often in practice.
Once appointed, a receiver may take possession of, manage, and sell some or all of the company’s assets.
Appointment of a Receiver
A secured creditor’s right to appoint a receiver is purely contractual; it will depend on the wording of the security agreement. It should be noted, however, that in practice most security agreements include the power to appoint a receiver. Likewise, the receiver’s powers are not only set out within legislation but also under an underlying contract allowing the receiver to be appointed in the first place.
Most of these security agreements require that a formal demand of any outstanding debt is made before an event of default that triggers the right to appoint a receiver occurs.
It is important to review these documents once a company shows signs of financial distress and enforcement options are considered. At Norling Law, our experts are experienced in dealing with receiverships and offer aFREE 30-minute Legal Consultation where they can discuss the issues and add strategic value.
Status of Receivership
The appointment of a receiver does not change the legal status of the company; the company is still the same legal entity as it was prior to the receivership. Generally, the legal rights of the company in receivership are not limited by a receivership. The company can still commence or continue legal proceedings and its contractual and property rights are generally unaffected.
Some contracts with third parties, however, expressly provide for termination of the contract if one of the contracting parties is placed into receivership. Subsequently, it is important to review all contracts to see if they are potentially affected by a receivership of either of the contracting parties.
Powers of a Receiver
The security agreement itself is usually the fundamental source of the receiver’s powers. However, these powers are also supplemented by the provisions of s 14(2) of the Receiverships Act 1993 (“the Act”). These statutory powers are subject to the deed or agreement or the order of the court by or under which the appointment was made.
It is advised that all powers that are intended to be granted to a receiver are expressly included in the security agreement, as some powers, such as the power of sale, are not expressly included under the Act.
Likewise, it is advised that powers that are not intended to be granted to a receiver are expressly excluded in the security agreement if they have been statutorily included under s 14(2) of the Act.
Examples of powers usually granted to a receiver are:
Power to collect and sell the debtor company’s assets;
Power to operate the debtor company’s business;
Power to restructure the debtor company’s affairs;
Power to borrow for the purpose of the receivership;
Power to execute all necessary documents on behalf of the debtor company;
Power to commence and conduct legal proceedings in the name of the debtor company;
Power to apply to Court for directions in relation to any matter arising in connection with the performance of the functions of a receiver; and
Power to take remuneration and indemnity.
The basic function of a receiver is to take control of the assets in receivership and to generate cash through profitable trading, or more commonly, the sale of all or some of the assets and pay the proceeds to the appointing creditor.
Duties of a Receiver
The receiver must exercise his or her powers in a manner he or she believes, on reasonable grounds, to be in the best interests of the appointing creditor (s 18(2) of the Act). Although a receiver must exercise his or her powers in good faith and for a proper purpose (s 18(1) of the Act), a receiver may not always act in the best interests of the company or other creditors, to the extent that s 18(3) of the Act applies. Subsequently, this means that a receiver’s primary duty is to the appointing creditor, and a subservient secondary duty is to have reasonable regard to the interests of the debtor company and its other creditors.
Receivers also have reporting obligations that they must abide by. Not later than 2 months after the appointment, a receiver must prepare a report on the state of affairs with respect to the property in receivership including:
Particulars of the assets comprising the property in receivership; and
Particulars of the debts and liabilities to be satisfied from the property in receivership; and
The names and addresses of the creditors with an interest in the property in receivership; and
Particulars of any encumbrance over the property in receivership held by any creditor including the date on which it was created; and
Particulars of any default by the grantor in making relevant information available; and
Such other information may be prescribed.
The report must also include details of:
The events leading up to the appointment of the receiver so far as the receiver is aware of them; and
Property disposed of and any proposals for the disposal of property in receivership; and
Amounts owing, as at the date of appointment, to any person in whose interests the receiver was appointed; and
Amounts owing, as at the date of appointment, to creditors of the grantor having preferential claims; and
Amounts likely to be available for payment to creditors other than those referred to in paragraph (c) or paragraph (d).
The grantor and any person whose interests the receivers were appointed are entitled to receive the report. Furthermore, any creditor, director, or surety of the grantor, or any person with an interest in any of the property in receivership may request a copy of the report.
Receivers must also, no later than 2 months after each period of 6 months after their appointment, or the date on which the receivership ends, prepare a report summarising the state of affairs with respect to the property in receivership, including all amounts received and paid during the period that the report relates to.
This report must include details of:
Property disposed of since the date of any previous report and any proposals for the disposal of property in receivership; and
Amounts owing, as at the date of the report, to any person in whose interests the receiver was appointed; and
Amounts owing, as at the date of the report, to creditors of the grantor having preferential claims; and
Amounts likely to be available as of the date of the report for payment to creditors.
Summary
Receiverships are notoriously contentious; in every receivership, there are emotional and frustrated parties. It can be an arduous process to navigate for all parties involved. Whether you are a creditor wanting to enforce a security agreement to appoint a receiver, a receiver managing the assets of a company, or a director of a debtor company, Norling Law can assist you to ensure that a commonly stressful, contentious process is made smoother.
Our expert receivership lawyers assist clients to navigate this process throughout New Zealand. There are many pitfalls if implemented incorrectly.
Please refer to our People for more information on who we are, our experience, and how we can help you.
This article deals with the seminal Court of Appeal decision (CoA Decision) released on 31 March 2021 in the proceedings commenced by the liquidators of Mainzeal Property and Construction Ltd (in Liq) (Mainzeal) against its directors for breach of director duties.
We have previously published an article regarding the High Court decision (HC Decision), which can be found here.
We have also released a comprehensive video outlining the rise and fall of Mainzeal which can be found here.
For the sake of brevity, this article will not discuss the distressed history of Mainzeal, but rather, will focus on the CoA Decision and its implications on directors of insolvent or near insolvent companies. This article is not a full discussion of the 178-page decision, rather, it is aimed to provide a brief summary. If you would like to read more about the history and context, the HC Decision and the video referred to above provide excellent context.
Importantly, when Mainzeal failed, it owed $110m to unsecured creditors.
Companies Act 1993 (Act)
The relevant director duties under the Act which were subject to the HC Decision and the CoA Decision are:
Section 135: Reckless trading
A director of a company must not—
(a) agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors; or
(b) cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.
Section 136: Duty in relation to obligations
A director of a company must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.
HC Decision
Section 135
To give context to the CoA Decision, the conclusions of the High Court in determining that the directors of Mainzeal were in breach of s 135 are:
Mainzeal was balance sheet insolvent while trading, as the intercompany loan was not recoverable. The directors should have seen the warning signs and should not have classified it as an asset on their balance sheet.
The assurances provided by Mr Yan could not be reasonably relied upon by the directors. Further, they were contingent on Mainzeal’s continued operation.
Mainzeal’s usage of creditor funds as their working capital combined with the fact that its financial trading performance was poor and prone to significant one-off losses meant that the risk of creditors losing out was high.
The directors failed to seek independent legal advice regarding their obligations. This would have alerted them to the fact that the assurances provided by Mr Yan were not legally enforceable.
As a result, the directors were found to be in breach of their obligations under s 135. Consequently, they were ordered to pay $36m in compensation, with three of the directors liable for a maximum $6m each and the fourth director, Mr Yan, liable for a maximum of the full amount.
Section 136
The High Court held that the directors of Mainzeal did not breach s 136, as s 136 required “a focus on particular obligations under specific construction contracts that Mainzeal was entering into”. The specific transactions or obligations entered into were not identified in the pleadings.
The High Court further held that, even if the specific transactions were plead, the High Court would have still rejected the s 136 claim, stating that:
There would be no reason to conclude that the directors either did not believe that those obligations would be fulfilled, or that the reasons for believing they would be fulfilled were unreasonable. It would not have been apparent to the directors that Mainzeal’s failure would occur, or would likely occur immediately, or within a particular period of time, at least until very near to the point when Mainzeal failed.
In the High Court’s view, this “seems to be critical to establish liability under s 136 in these circumstances”.
CoA Decision
The issues on appeal in the context of insolvency and directors’ duties can be summarised as:
Did the directors breach s 135 of the Act?
Did the directors breach s 136 of the Act?
If the directors breached s 135, on what basis should compensation be assessed whilst also considering s 301 of the Act?
Section 135
The Court of Appeal agreed with the HC Decision’s findings of fact and also agreed with the finding that the directors breached s 135.
The Court, however, found that the s 135 breach did not result in any recoverable losses. The arguments that the liquidators put forward, being the ‘entire deficiency’, ‘net deficiency’ and ‘new debt’ approaches were in Court’s view inappropriate under s 135 and in the current scenario. In particular:
As the breaches of s 135 did not cause the company to become insolvent, the ‘entire deficiency’ approach was not relevant.
As the liquidators could not satisfy the Court that there had in fact been a ‘net deficiency’ between the date of the breaches of s 135 and the eventual liquidation, the ‘net deficiency’ approach could not be used. In particular, on a net basis, Mainzeal had fewer debts at the time of liquidation, then when the directors’ breaches of their duties started.
The Court also provided a definitive ruling that the ‘new debt’ approach cannot be used in assessing the quantum of damages for a s 135 breach. This is because the duties of a director under s 135 are owed to the company, rather than individual creditors. To allow a ‘new debt’ approach would necessarily involve a calculation of losses to individual creditors, rather than to the Company itself. In essence, it would allow for older creditors to achieve a windfall, and newer, unpaid creditors would receive a shortfall. This is because distributions would have to be made on a pari passu
Section 136
The Court of Appeal overturned the High Court’s decision regarding s 136.
The Court held that claims for s 136 did not have to be specifically plead, as they do not have to relate to discrete defined acts. Rather, they apply to all obligations entered into by the company.
The Court then held that it would take the narrow interpretation, whether, as a matter of fact, there were reasonable grounds for believing that obligations would be performed when due. If there are reasonable grounds, then there would be no breach of s 136. This is to be determined objectively. It did not matter that the directors of Mainzeal believed that obligations would be performed when due; the Court held that a reasonable director would not have believed that there were reasonable grounds for the performance of obligations.
The Court found that the creditors who dealt with Mainzeal were exposed to an abnormal level of risk, which the Court stated was the precise harm that s 136 was designed to prevent.
Accordingly, the Court held that the ‘new debts’ approach is appropriate for claims under s 136.
This is because any new obligations undertaken by the directors when there is no reasonable belief that these obligations can be performed when due are likely to be ‘new debts’.
If new debts cannot be accounted for under s 136, there is no logical link behind the wording of the provision and potential claims for losses.
The Court of Appeal has subsequently reverted the case back to High Court to determine the appropriate quantum of compensation under s 136.
We are yet to receive a Decision on this.
But we expect this amount to be significantly higher than $36m that was previously ordered. Based on the approach adopted by the Court of Appeal, our view is that the High Court ought to order that the directors pay $64m – $75m in compensation. However, this amount may be adjusted through the process of the Court exercising discretion available under s 301.
Implications in the Insolvency Context
There are three potential starting points in quantifying claims against directors who are trading companies insolvently or potentially near insolvently:
Net Deficiency: This is usually the starting point in most cases for breaches of s 135 and is calculated by taking the financial position of the company at the date that it should have stopped trading, and the date of liquidation. The difference is then considered a net deficiency (if negative) and becomes a starting point in quantifying the director’s liability.
Entire deficiency (or whole debt): This is generally used when a single or multiple discrete quantifiable breaches of s 135 are the cause of the insolvent liquidation, and but for these breaches, the company would otherwise be solvent. The whole debt(s) of the company are treated as a deficiency and become a starting point in quantifying the director’s liability.
New debt: This is unavailable for breaches of s 135, however, this will likely be the new starting point for breaches of s 136. All new debts incurred after the start of the breach of director’s duties are added and this amount then becomes a starting point in quantifying the director’s liability.
For directors, this means that there will be additional risks when dealing with insolvent or nearly insolvent companies. The new debt approach for breaches of s 136 presents a big hurdle for any attempts to trade out of insolvency, as the determination of reasonable grounds to believe that an obligation will be able to be performed when due is of an objective standard.
We expect to see more claims against directors who may have honestly believed that they were trying to achieve the best outcome for their creditors by trading out of insolvency but would be liable for new debts if they are ultimately unsuccessful.
Both the HC Decision and the CoA Decision reiterate that the risk to directors who are reckless, or do not fully appreciate their solvency status, is high. Directors need to carefully evaluate a company’s position once it becomes insolvent and to soberly consider the prospect of continuing to trade.
At the time of this article, it is not known whether the decision will be appealed to the Supreme Court. Although, appeals are likely for cases of this magnitude.
If you are in a challenging position as a director, our team of experts can assist and guide you through your company’s insolvency. contact the team at Norling Law at info@norlinglaw.co.nz or you can book a consultation here: https://norlinglaw.co.nz/consultation-brent/
Original tax debt can quickly get out of control with the accruing interest and penalty fees. This may result in the debtor becoming insolvent and facing bankruptcy (for individual debtors) or liquidation (for companies) proceedings commenced by the Inland Revenue Department (“IRD”).
At Norling Law, we have extensive experience negotiating settlements with the IRD. The settlement with the IRD could be in the form of a provisional payment plan and/or partial principal debt/interest/penalties write-off. When faced with a settlement proposal, the IRD has a set of requirements that they must consider. At Norling Law, we take these requirements into account when formulating a settlement proposal.
In the event the debtor is not in a position to settle the debt, we can provide advice on other alternatives to bankruptcy and liquidations. The sooner the issue with the outstanding debt is addressed, the more options could be available.
Below we set out a recent example of negotiations conducted by us on behalf of a client, which resulted in a significant write-off of the client’s debt to the IRD.
Our client was in significant arrears with the IRD, amounting to approximately $260,000. This particular client, due to unforeseen circumstances, failed to meet its tax obligations over a period of approximately 4 years.
Our client came to Norling Law for assistance when the IRD had served it with liquidation proceeding and there was a hearing date scheduled in the High Court.
First, we explained the consequences of liquidation and provided our client with general insolvency advice. We also provided an outline of various steps and timelines that would take place in the liquidation proceeding, which helped to reduce the client’s stress levels.
We also interviewed our client and each director and explored:
the personal and financial circumstances they were experiencing at the time of non-payment;
the ability to settlement;
the steps they have taken to restructure the management of the company in order to prevent future non-payments; and
other matters relevant for an application for financial hardship.
We then conducted negotiations with the IRD on behalf of the client focussing on these four areas. The outcome was an astounding $204,000 reduction in the tax payable. Our client was able to avoid liquidation and resolve the matter entirely by paying a lump sum of $20,000 and the balance of $36,000 in monthly installments over a period of 3 years.
Our client could draw a line in the sand and move on with business free of the stress of having outstanding arrears with the IRD and the threat of liquidation.
Whether a reduction of the debt owed to the IRD could be achieved would depend on various circumstances associated with the non-payment of tax, position of the debtor and etc.
